HOW TO GET STARTED WITH UK BUY TO LET - STEP 3 - MORTGAGES

HOW TO GET STARTED WITH UK BUY-TO-LET.

?Are you thinking of getting involved in UK property with Buy-to-Let but don’t know where to begin?

If so, you have come to the right place! Over the past three weeks we have been going through a simple 7 step process for planning out and purchasing a UK buy to let.

This article (number 35 overall) is about the third step in our simple 7 step process to buying property in the UK.?

Mortgages.

To start with, we looked at how to define your goals. Remember the old adage that you can’t hit a target you are not aiming at? Well, get yourself some well-defined goals and the path to them will become clearer.?

Last week, we looked at locations. More specifically, how to choose a location based on your goals and the search criteria set out in step one. Having a clear goal will help eliminate 95% of the properties out there on the market, so make sure you spend some time on it, and do it well.

This week? Step 3. Get a mortgage sorted.

1.????Define your goals.

2.????Choose a location

3.????Get a mortgage sorted

4.????Conveyancing - Get your legals sorted.

5.????Making an offer

6.????Managing a property

7.????Finding Tenants

We have set out the whole process in a handy 32-page ebook:?How to purchase UK property while living overseas.?And if you are impatient to get everything at once, then drop me a message and I will send you a copy of the ebook. But, if you like your information in smaller, bite-size, chunks then you have come to the right place.

Mortgages.

The subject of mortgages seems to be one of the most commonly misunderstood aspects of purchasing a property from overseas. Many people hear the stories that it simply can’t be done, or that you need to be earning a fortune, while others think that you need 40% plus deposits.?

Thankfully, none of these are true. The process is, in fact, quite simple and straightforward and a 25% deposit is usually enough.

I’m going to break this article down into some simple steps, so that you can skip to the ones that apply to your or read them all to get an overview of how it all work.

1.????Residential vs Buy-to-let.

2.????Documents required.

3.????Potential lenders and common misconceptions.

4.????The process.

5.????Working with a broker.

6.????Getting a decision on principle.

7.????Rates.

If you would like to listen to a recent podcast we did on mortgages, then please check out the below.

?1.??Residential vs Buy-To-Let.

?This article series is called ‘how to get started in buy-to-let’ so I am going to focus a bit more on this but I will give a brief outline of residential mortgages for some context.

Residential.

When applying for a residential mortgage, it will be for a property you personally want to live in and not rent out. Lenders will focus far more on your income and salary, as YOU will be the one paying the mortgage – (you won’t have a tenant!). Therefore, expect more stringent checks on your own personal income and expenses. Lenders regulated by the Financial Conduct Authority have a responsibility to make sure that they only lend to people who can afford the commitment they are making.

?Buy-to-let.

When you apply for a buy-to-let mortgage, lenders will be more interested in the income the property will get. They will still check your income and expenses, but it is the rent which will pay for the mortgage. Different lenders will have different ratios they require for the rent against the mortgage payments (typically, rent must be 125% of the mortgage cost). The lenders need to know that the rent be more than enough to cover the mortgage and then some. They may also apply some stress testing – will the payments be covered if there is a rise in interest rates ?– see below article for more info?. When the lenders are confident the income from the tenant will be sufficient they are happy to lend to you against the property’s rent and there will be less focus on your personal income and salary.

?2.??Documents required.

Lenders love the paper trail and will often ask for all sorts of proofs as part of their own due diligence requirements.

As a minimum expect to provide

·??????3 months’ pay slips.

·??????3 months’ bank statement.

·??????Proof of address.

·??????Proof of ID.

These are the basic requirements and you can get these ready before you engage a mortgage broker.

The chances are more information will be required based on the lender you are working with, but this is not usually too strenuous, and is generally things like, bank statements for additional accounts, extra months’ pay slips, proof of bonuses etc.?

3.??Potential lenders, common misconceptions.

Another common complaint I come across is when expats (and other people living overseas) try to use UK Highstreet banks and lenders for their borrowing while they are living overseas …

The thinking goes, I already bank with NatWest (or whoever), and may already have a mortgage on my home with them, so why not approach them for a buy-to-let mortgage?

The trouble is, they don’t need the business, (they get enough from the UK market), and some of them don’t like the perceived extra ‘risk’ of lending to expats or people outside the UK.

In most cases, it’s better to work with the banks and building societies that specialise and have a track record in working with the expatriate community or those living outside the UK. Skiptons, Bank of China, HSBC offshore, NatWest offshore, Shawbrook, Dudley Building society to name a few.?

4.??Working With a Broker.

?Working with a mortgage broker that specialises in working with expats is advisable.

A good broker is worth their weight in gold, as they know exactly what type of lenders are most likely to lend based on your situation and they should have their finger on the pulse of the mortgage market and be able to track down the latest interest rate offers and best deals.

Each situation is different, and each lender is different and a specialist broker will help you navigate this complex market and find the lender that best suits your situation, as well as the lender that will be easiest to apply to given your own specific circumstance.?

Bear in mind that initial conversations with a broker are free, and they will only charge a broker fee (usually GBP200-800) should you decide to use their services … They will send you a document setting out their terms of service and you will need to prove your identity to the satisfaction of the broker. Generally though, it’s money well spent as brokers take a lot of the hassle and guess work out of the process.?

Have a look at the below video where we spoke with one such specialist broker!

5.??Getting a decision in Principle.?

A decision in principle, or a DIP, is the stage you reach once a lender has looked at your situation and agreed that they are happy, ‘in principle’ to lend to you.

Having a decision in principle puts you in a very strong position when making an offer on a property, as it shows you have the deposit ready, and a mortgage offer in place. Given a choice between an offer on a property with no DIP and yours with a DIP in place and proof of purchase funds well … which would you choose?

If you are buying a property off-plan, you can get your DIP on a property so that you know that a lender will lend on it, but you do not have to physically apply for the mortgage until 3 months from completion.

6.??Moving forward.

After a Decision in Principle from a lender, if you decide to take up the mortgage with that lender, then you move to the next stage where they make you their official mortgage offer.

Before they do this, they will carry out a valuation on the property, and may ask for other documents that pertain to the property such as condition reports on the electrical installation, or the EPC certificate on a property. to make sure they are not lending to little or too much, once this is done and they are satisfied, they will make an official ‘mortgage offer’.?

Usually these are valid for 3-6 months, and, in many cases can be extended to 6-9 months, if a purchase falls through, or a new build is delayed.

7.??Current Rates.

We spoke recently on our market mosey podcast about the impact of rising interest rates on mortgages, for

·??????New mortgage applicant.

·??????Existing mortgages looking for new deals

·??????Those coming to the end of fixed terms.

?Please have a listen below.

?At present (Sep 2022), for buy-to-let property, rates of circa 3-4% are achievable, perhaps a bit more if you are a first-time buyer, but the exact rate will depend on your situation and the amount of deposit you are putting into the purchase.

?Even a rate on the higher end of 4% plus should not be too much of a worry if you have done your figures right and are buying a property with a good yield. See below a screenshot of the yield calculator I put together to help with this. Please let me know if you would like a copy.

?Summary.

Ok! There we have it! About as accurate and up to date a summary on mortgages that you’ll get at the moment, and it is taken from my own first-hand experience over the past 6 months. I have been through all of it, including delays, increases in interest rates, working with a broker, getting an extension and all the rest!

If you have further questions, please ask, and if you would like to find out how we are working with our clients to help them secure mortgages then please put a comment in the comments section or send me a direct message.

Kind regards,

Callum