The accidental landlord: buy-to-let mortgages

Victoria Whitlock speaks to a financial adviser about getting a mortgage, and is surprised by what she discovers
With interest rates low (ish) and the rental market very strong, I find myself occasionally scrolling through flats for sale on Homes & Property looking for another rental flat — something modest, you understand, in one of London's cheaper boroughs. But now that banks are choosier than in the past about who they'll lend to, I wonder if there's any chance I'll be able to get a mortgage.

I've almost decided that the answer is definitely no, given that I'm selfemployed with no guaranteed income, when I'm invited to meet financial adviser Martin Stewart, of London Money. I admit that I'm reluctant at first. The last time I met with a financial adviser he lured me to his office with a plate of ham sandwiches (don't scoff, I was earning less than £100 a week and starving) and sold me an interest-only 110 per cent mortgage from Northern Rock and a dodgy endowment.

I'm much older and a little wiser now, but when Martin said he had chocolate chip cookies, I didn't need to be asked twice.

Anyway, Martin seems to think it might be possible to find a lender prepared to advance me the money for another rental property, largely because banks are, in his words, very keen on the buy-to-let market at the moment.

Residential mortgages are so tightly regulated these days that some banks much prefer to lend to landlords instead. Unlike residential mortgages, buy-to-let (BTL) mortgages are not regulated by the Financial Services Authority.

Apparently, with a gross income of let's say £20,000, the average I'd be able to borrow to buy somewhere to live would be four times my earnings, so £80,000. But if I want to buy somewhere to let I could potentially borrow up to £200,000, assuming the rental income would cover the monthly mortgage payments. Also, although interest-only mortgages are difficult to find for residential property, that's not the case for buy to let.

You can see why it might be tempting to apply for a buy-to-let mortgage rather than a residential mortgage to buy a home, but sadly that's not allowed.

Martin told me lenders are checking up on borrowers these days to make sure they aren't living in properties bought with a buy-to-let mortgage.

You still have to jump through quite a few hoops to get a buy-to-let mortgage, says Martin, who assures me that the days when (less scrupulous) brokers might have encouraged clients to exaggerate their salaries and tell a few porkies are long gone. You'll need proof of earnings of up to £40,000 for some lenders (although some will accept as little as £20,000). Some lenders will take existing rental income into consideration, but some won't.

You'll also need a pretty large deposit of at least 20 per cent of the property's value, and up to 25 per cent if you want a mortgage with a lower interest rate.

Typical interest rates for buy-to-let mortgages are 3.5 per cent to 4.5 per cent, which is not bad, but bear in mind that you'd be doing very well if you got a return of more than seven per cent on a rental property in London, so you're not going to get rich on the rent.

"You don't buy rental property in London for the rental income," says Martin. "You buy it for the capital growth."

He points out that the costs of buying property means it has to be a long-term investment. "For a typical one-bedroom flat at £300,000 you're going to have at least £12,000 in upfront costs, so you've got to think of it as a 10-year-investment."

All good advice, I think, which I'm taking with me flat hunting.

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