Switching from a residential mortgage to a buy to let mortgage may sound like a daunting task, but it’s actually more common than you may realise.
However, before you rush out to switch to a buy to let, it’s important to understand the benefits and drawbacks of such a move to make an informed decision. In this article, we’ll cover the key points you need to know when considering a changing a mortgage to buy to let.
Before we get started, let’s first look at what exactly a buy to let mortgage is and how it differs from a residential mortgage.
What is a buy to let mortgage?
Simply put, a buy to let mortgage is specifically designed for people who want to buy a property with the intention of renting it out to tenants. Unlike a residential mortgage, the rules and regulations for buy to let mortgages are different.
Firstly, buy to let mortgages usually prohibit the owner from living in the property or allowing direct relatives to live in the property. This is in part due to the fact that residentially mortgages are fully authorised and regulated by the Financial Conduct Authority (FCA). As such they must adhere to strict rules and guidelines.
Buy to let mortgages on the other hand are not often not regulated in the same way. This is because they are considered a business transaction.
Regulated buy to let mortgages do exist, but are more of a specialist product used when you let your home to an immediate member of the family, or if you become an ‘accidental’ landlord.
If you’ve seen our guide to tax for airbnb hosts, and are considering letting out your entire home as an airbnb, then you’ll likely need a buy to let mortgage.
Can I rent out my home without a buy to let mortgage?
Typically, residential mortgages don’t permit letting out your property without first obtaining consent from the mortgage lender.
In some circumstances though, your lender may allow you to temporarily rent your home out, often for up to a year. This is called ‘consent to let.’
This is especially true if you will be temporarily working away from home, travelling, moving in with a partner etc… In such instances you may want rent out your home to help cover the mortgage payments while you are away.
It is important to get consent beforehand though. If you were to go ahead and let the property without first gaining consent you could be in breach of contract and as such the lender would be within their rights to ask you to repay the mortgage in full.
If you want to rent out your home on a longer basis, you’ll either need to convert your mortgage to a buy to let mortgage, or completely re-mortgage with a different lender.
How does changing a mortgage to buy to let work?
If you can’t get consent to let or it doesn’t fit your situation, you’ll need to switch to a buy to let mortgage, which involve re-mortgaging onto an entirely new product.
There are some things to consider before considering a switch as buy to let mortgages would a little differently to their residential siblings.
Buy to let mortgage loan to value
The loan to value (LTV) requirements of buy to let mortgages are usually higher than those for residential mortgages, where it’s sometimes possible to get a 100% mortgage. Typically, this is set as a maximum of 75%, meaning you’ll need at least a 25% deposit for buy to let mortgage versus 85-95% for residential mortgages.
If you own less than 25% of your home outright and are considering changing to a buy to let mortgage, you may need to put in more cash before your lender will consider a change.
Interest only mortgage
Buy to let mortgages are usually interest only. This means that your monthly payments only cover the interest portion of the mortgage. The principle i.e. the sum you actually borrowed, gets paid back in one lump at the end of the mortgage term.
The idea behind this is that the property is an investment there to make you money. As such, landlords will continually re-mortgage the property, until they are ready to sell, then pay the principal sum back from the proceeds of the sale.
This becomes an issue during periods of falling house prices, as you can easily find yourself in negative equity.
Can I change my mortgage to buy to let?
Buy to let mortgages are typically more difficult to obtain, and expensive then their residential cousins.
In addition to all the usual mortgage checks, such as proof of income, credit history etc. lends will also carry out in-depth affordability checks based on your projected rental income.
Monthly rent – Interest cover ratio
Your lender will want to be sure you’ll be able to collect somewhere in the region of 125-145% of the monthly mortgage payments in rent. This is called the interest cover ratio (ICR). They see this additional income as a buffer to cover and maintenance issues and void (empty) periods.
So, if your mortgage is £750 a month, your lender may want to see a potential rental income of £1,125. That might sound like a lot, but just remember, every lender is different, and some might be happy with a lower figure.
How long you’ve owned the property
Typically, you need to have owned the property for more than 6 months before considering switching to buy to let. 12 months would be even better. This is to make it clear to the lender that didn’t buy a property on a residential mortgage with the specific intention to let it out later.
Where you plan to live
If your former home is the only property you own, lenders will be keen to know where you plan on living while it is rented out.
Moving in to rented accommodation my raise a red flag with some lenders or at the very least require further explanation.
This is because the house you plan on living in might have a higher rate that the house you are renting out. If your tenant should fail to pay you, or if the property is empty for a long period, it could leave you in financial trouble.
Even if you plan on moving into a house share, or the place you choose to rent is substantially cheaper than the rent charged on your property, it may still raise eyebrows. As the lender will be keen to know what happens if you are forced to move out suddenly.
Moving in with a relative, or partner, and potentially living rent free, would be looked on more favourably, but in the lender’s eyes nothing beats owning another residential property.
Next steps on your buy to let journey
Still interested in changing your mortgage to a buy to let? After considering the information above your next steps would be to find an experienced mortgage broker to run you through your options.
While we can’t offer any personal recommendations, Habito provides a free online mortgage service that can help you get the best deal on your buy to let mortgage. It was shortlisted for Best Mortgage Broker 2023 at the British Banking Awards, and winner of the same award in 2020.
Alternatively if you’d prefer to speak to someone, Unbiased can help put you in touch with a mortgage advisor.