So is it possible to change the status of your home loan from a residential mortgage to a buy to let mortgage? Yes, it is possible, but before you make the move, there are many different aspects of the change that you need to consider carefully.
Many people don’t realise the differences between a residential mortgage secured on a residential property and a buy to let mortgage. Buy to let mortgages are a vehicle for people wanting to invest in property to let a property to tenants rather than using it as a home for themselves. A residential mortgage is the route to choose if you buy a property for your own use, which will usually be your main residence.
Generally, you need a higher deposit for a buy to let mortgage, typically 25% of the property value. Many people securing buy to let mortgages opt for an interest-only mortgage, and there are usually higher costs associated with buy to let mortgages such as elevated product fees and higher interest rates, as well as stringent stress testing criteria.
If you are considering changing the status of your mortgage to a buy to let, then you should seek advice from a specialist mortgage broker firm like us, here at Mortgage360, will be able to advise you on how to proceed and also help you secure the best mortgage rate for your circumstances.
Why switch your mortgage to buy to let?
Many individual circumstances may lead you to consider changing a residential mortgage to a buy to let mortgage. Life is never straightforward, and things can change quickly which may make letting out your property instead of living in it a sensible decision. You may be upsizing to a new property or moving away from the area, and want to retain ownership of your current residential property.
You might want to travel abroad for an extended period, or even live in another country for some time, but keep your home to move back to when you are ready. Or maybe you are moving in with a partner and want to retain your existing property whilst raising some income through letting the house, requiring a buy to let mortgage.
Whatever the reason, making the decision not to sell the property and change your mortgage to a buy to let, can be a good way to move forward.
Is now a good time to become a landlord?
Property is seen as a good return on investment, but in 2024 landlords face issues like higher mortgage rates than have been seen for many years, so a buy to let investment shouldn’t be a short-term decision.
As a guide, the buy-to-let stress test is calculated based on the actual or anticipated gross rental income for the property. This is usually set at a minimum of 125% of the proposed mortgage repayments for a buy to let mortgage. Before 2023, the stress test rate was nearer to 4% but today, it is 5% to 5.5%.
The stress test rate is used to assess your ability to continue to afford the mortgage payments should interest rates rise further, without having to rely on any of the rental income. Stress testing measures mean it can be more difficult to secure a buy to let mortgage or switch from a residential mortgage to a buy to let mortgage.
“If you do decide to become a landlord you’ll be joining a group of over 2.84 million others who declared income from renting a property in 2022 to 2023.” Gavin Watson, Mortgage Advisor
Are there any other options?
This is dependent upon your situation. If you intend to resume living at the residential property at some point in the future, or you’re tied in with a deal, then it’s worth contacting your existing mortgage lender to seek what is known as ‘consent to let’. This is usually granted for a short period, such as 6-12 months if you plan to go travelling or maybe live abroad, or elsewhere for work for a short time.
This can impact your standard residential mortgage in different ways; you may be expected to pay a higher interest rate for the period of the let, and you may be charged an administration fee for being granted consent to let. However, these terms will be dependent upon your lender’s approach to consent to let. The process is normally quick and can usually be done within 48 hours.
Consent to let is unlikely to be granted if you have only lived in the residential property for a short time, if you have very little equity in your home or if there are arrears on your mortgage payments. Your current mortgage provider will also expect you to have a formal approved tenancy agreement in place. Remember that you will also need to consider your insurance provision and other things such as mandatory safety certificates.
Can you switch to a different mortgage lender?
Yes, just like any type of remortgage, you can choose to move to another mortgage provider, who may have better terms on buy to let than your current lender. Consulting with a specialist mortgage advisor here at Mortgage360, will mean you have access to many different providers across the whole of the buy to let market when looking at switching mortgages.
If you are changing providers from your current lender to move your mortgage contract to a buy to let, your mortgage advisor will also make you aware of any issues, such as an early repayment charge or legal fees, which may mean it makes more sense to stay with your existing provider.
Switching to a different mortgage type
Whether you are remortgaging to a new lender or changing your mortgage product with your current lender, you may want to consider the type of mortgage you take out. A residential mortgage is usually a repayment mortgage where the total amount owed reduces over the mortgage term.
Landlords may be more focused on higher yields initially and choose an interest-only mortgage, using the property as an investment to generate income. If you want to continue to pay off the loan on your property, then opting for a repayment mortgage will be the right approach.
How much equity do you need to switch to buy-to-let mortgage?
In principle, the interest rate on residential mortgages is lower than on buy to let mortgages for a rental property. Lenders will usually require you to have 20-25% equity in your property to change your mortgage to a buy to let.
Will I need to pay stamp duty on a buy to let mortgage?
If your property intentions change, there may be additional stamp duty to pay, as stamp duty rates are calculated differently if you’re left with two mortgages. You usually only pay stamp duty once when you acquire a new property.
It’s important to seek professional advice from a Tax Advisor or Accountant who specialises in this area, as there are tax implications if your property becomes an investment, from Capital Gains Tax, to Inheritance Tax to higher personal income tax because you now generate rental income.
How to switch your mortgage to a buy to let?
Switching to a buy to let from a residential mortgage for your current property can be challenging, but it can be a good way to open up new opportunities in life. Talk to an experienced mortgage broker, here at Mortgage360, and we can guide you through the process, helping to navigate issues like early repayment charges and mortgage set-up fees, or securing a new lender.
Forecast your potential rental income
Potential buy to let lenders will want to know if your proposed income from the property will cover the cost of your mortgage repayments. Your mortgage broker will help you to provide evidence to accurately forecast your rental income.
Find the best product for your circumstances
This may simply be to seek consent to let from your existing lender, changing lender to a permanent buy to let mortgage arrangement, or looking at the wider market with a focus on more specialist buy to let providers to ensure you secure the right deal for your circumstances and requirements.
Prepare your application
Talk to our friendly team who will help you to prepare your mortgage application and ensure you have the right documentation to make the process as smooth and problem-free as possible, speeding up your mortgage application.
Eligibility criteria
Every lender will have slightly different eligibility criteria, but they will look at several headline issues, including;
LTV Ratio
Existing homeowners will be familiar with the term loan-to-value ratio (LTV). If you are switching to a buy to let mortgage, the deposit is essentially the equity you already have in the property. For a residential mortgage, the LTV can be as much as 95%, but for a buy to let mortgage it will typically be capped at around 75%. You will need to have at least 25% equity in the property to make the switch.
Projected rental income
For a residential mortgage, your income is the defining factor in determining affordability, however for a buy to let mortgage, the lender will look instead at the proposed or actual rental income for the property. They will typically be looking for between 125% to 145% of the mortgage repayments.
Previous landlord experience
This may be viewed as a positive by some lenders, and can help to secure a better deal if you switch your mortgage to a buy to let but it is not essential with all lenders.
Credit history
A less than perfect credit history may not necessarily prevent you from securing a buy to let mortgage, but a good credit rating will help secure a better deal in terms of interest rates.
How long you’ve owned the property
Think about timing – if you have held your existing residential mortgage with your current mortgage lender for less than 6-12 months, moving to a buy to let mortgage will be more difficult.
How Mortgage360 can help you find the right BTL mortgage lender
Mortgage360 can help. With our wide-ranging experience across the entire mortgage market, our mortgage advisors make sure you understand the process, from having the right levels of equity to determining if the property can generate enough monthly rent to cover your mortgage repayments and help you secure the best buy to let product for your circumstances.
Talk to us, here at Mortgage360, about your buy to let mortgage options.
Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained within this article was correct at the time of publication but is subject to change.
