Purchasing or remortgaging a buy to let mortgage offers a myriad of choice, understanding some key aspects of lender criteria can help keep you on the right track.
Andrew Turner, chief executive at specialist buy to let broker Commercial Trust Limited, shares insight on some of the considerations to help get a buy to let application accepted by a lender.
Ensure your property is not for sale
One route to getting into buy to let can be from a starting point of residential ownership.
If you change path and decide that, rather than sell, you would like to keep your former home and rent it out, it is important you conclude the selling journey before you make a buy to let application.
Lenders will not accept a buy to let application if a property is listed for sale.
If a property is discovered for sale post-valuation, you could stand to lose valuation fees if an application gets rejected as a result.
It is of course entirely sensible to establish what your options are in terms of a buy to let mortgage, before finalising a decision to take this route.
You might choose to do this whilst your property is still up for sale, which is a reasonable thing to do.
But, make sure an application is not proceeded with, until your property has been taken off the market.
Contact your estate agent(s). Check your property has no ‘for sale’ board outside and that it is no longer on the estate agent(s) website, or any property comparison sites they may have published the details on.
EPC Ratings
On April 1st, 2018, new Minimum Energy Efficiency Standards became law in England and Wales, meaning that, unless exempted, a landlord has to ensure their rental property has a minimum Energy Performance Certificate (EPC) rating of E, before any new tenancy could commence, either for existing or new tenants.
A valuer will typically look at the EPC rating of the property, as part of their assessment and will report their findings back to a lender.
Make sure that the property you are mortgaging has at least an E rating, as the ability to generate rent is negated if the you are not permitted to let it.
Some lenders may simply decline your application, while others will insist on work being carried out to ensure the property is compliant and lettable.
Planning ahead could save you time and could make the application process far smoother.
Property condition
Most lenders will assess the affordability of your mortgage loan on the amount of monthly rental income your property can potentially command.
This assumption is made through the valuer.
If in poor condition, this is going to affect the value of the property and also the amount of rent you might be able to charge.
Some lenders will require you to carry out work before they will accept a mortgage or remortgage application.
The better the condition of the property, the less likelihood there is that extra work will need to be carried out.
If the property is ready to let, this is a positive sign for a lender. So it is worth assessing the condition of the property and carrying out any repairs or maintenance work prior to applying for a buy to let mortgage.
If you have intentionally bought a property in a state of disrepair, with a view to making improvements and letting it out, a bridging loan may be a good solution for you.
Property that is not habitable (broadly speaking, that hasn’t got a functioning bathroom and/or kitchen) will not be eligible for a buy to let mortgage – simply because it cannot be rented out.
A bridging loan is a common alternative to get works done, at which point you can use a buy to let mortgage as your exit strategy from the loan. A broker giving good advice will arrange both products simultaneously, so you are not trapped into the terms of the bridging loan (these tend to carry a more expensive rate than a buy to let mortgage).
HMOs
Houses of Multiple Occupancy (HMOs) traditionally produce more rental income for landlords and there are a number of things that you can do to ensure your HMO mortgage application is successful.
Note that, to secure an HMO mortgage, the majority of lenders will want someone on the mortgage application to have had prior buy to let experience.
In recent months, we have seen the introduction of new HMO licensing laws, including new minimum bedroom size laws.
Lenders will want to know that your property meets all required criteria and the valuer will report back any discrepancies.
Local authorities will provide an HMO licence and each area will have its own rules around the health and safety conditions within the property, such as sufficient fire escapes and suitable electrical and gas standards.
This, combined with meeting minimum bedroom size rules, could mean that you need to carry out work on the property before you can obtain an HMO licence.
Without a relevant HMO licence, a lender could decline your application – or omit certain bedrooms that fail to meet size criteria, from their potential rental calculations. As a result, affordability assessments could be based on a reduced number of lettable bedrooms.
Be prepared ahead of your HMO buy to let mortgage application.
Find out what health and safety requirements your local authority has for granting an HMO licence and compare the condition of your property against these;
Compare the dimensions of the bedrooms in your property with the minimum bedroom size rules;
Establish how much it will cost to carry out improvements, if necessary;
Establish the cost of an HMO licence from the local authority.
Once all of the above is in place, you know how much it will cost to get your house in order, so to speak.
Once again, a bridging loan might be an option, if you need financing to carry out necessary work, to convert a property into a legal HMO entity.
HMOs can be a lot of work, but the returns, as mentioned, can make that extra investment in time and money worthwhile.
Bringing an HMO property up to scratch and obtaining any required licence, will be an encouraging sign for lenders.
Property location
A property’s location is something else that a mortgage lender will give consideration to.
This ties in with the type of property and tenant demand within the area, for that type of property.
A valuer will assess tenant demand for property type and what the local going rate is for monthly rent on that type of property.
This gives the lender an accurate picture of prospective rental income at the application stage and is a key factor in assessing a buy to let mortgage’s affordability.
Make your decision carefully on the type of tenant you want, the type of property they typically rent and areas where these two factors overlap.
If you require a buy to let mortgage on an HMO, in an area where there are few similar properties, you may find it hard to attract the right kind of tenant and it is possible that the lender will feel they cannot accurately assess your potential rental income, leading to a decline.
In all of the above scenarios, a little bit of planning ahead can make a huge difference.
It pays to do your research, before identifying the property you want to buy, to ensure that market forces ensure you can make the most of your rental income opportunity.
In that way you can plan for success.
Source: Andrew Pelis, Commercial Trust
