Things buy to let mortgage lenders don’t like and why.
Welcome to our buy to let guide.
Here is a list of the types of buy to let properties or buy to let situations that buy to let lenders consider higher risk and may not be prepared to grant a mortgage on or ask for a larger deposit.
1. Flats above shops, particularly food shops.
Buy to let lenders plan for the worst and flats above shops are generally harder to sell and harder to let out. If they have to repossess the property to recover the debt it is going to take longer to sell and their risk of loss is greater than a standard property. There are buy to let lenders that will consider flats above shops but your choice will be limited.
2. Studio flats.
Many buy to let mortgage lenders will have a minimum size for a studio flat. Again, this comes down to tenant demand and resale value. If you are considering buying a studio apartment to let out bear this in mind before offering on the property. When applying for a mortgage on a studio flat make sure you know the total floor space in square feet or meters before application.
3. Properties that can’t be let immediately.
If the buy to let property needs lots of work and can’t be let within 30 days this may be a problem. Most lenders want to know the property can be quickly let or quickly sold if there is a problem. If you are considering buying a property that needs refurbishment there are special mortgage products for this. Another tip is to meet the mortgage surveyor at the property with a detailed plan of what is going to happen and when in terms of work. As long as the surveyor is convinced the work can be achieved within the maximum time scales a mortgage may be approved.
4. Letting to a family member.
Standard buy to let mortgages are known as unregulated buy to let mortgages. If you are letting to a family member this loan needs to be a regulated buy to let mortgage. Most lenders will not consider this type of buy to let mortgage. Regulated buy to let mortgages are offered by a number of specialist lenders.
5. New build flats.
Most mortgage lenders consider new build flats as a high-risk property type and will either not offer a buy to let mortgage on the property or insist on a higher deposit. The reason for this is new build flats often lose a disproportionate amount of their value in the first few years of ownership.
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6. Flats with short leases.
If you are considering buying a flat or apartment to rent out the length of the lease will be an important factor to the buy to let lender. Many lenders will have a minimum lease length of 70 years and flats below this may not be considered. The reason for this is resale value and due to the cost of extending the lease. Lease extensions can be expensive and take a number of months if things are not straight forward.
7. Properties with restrictions.
A restriction is something within the lease or title that limits the properties use, resale value or who can buy the property. A common restriction may be the resale value could be limited to a percentage of the purchase price that was paid. For example the property can only be sold for 110% of the property price. So, if the property was purchased for £200,000 and then 10 years later it was sold again, the maximum resale price would be £220,000. This could limited future values. This particular restriction was put into place to keep prices low for key workers. Buy to let lenders generally will not consider properties with restrictions and residential lenders are also few and far between.
8. High rise properties
Depending on the location properties with more than 4 floors can restrict the number of buy to let mortgage lenders willing to lend. Generally, the location and valuers comments play a big part in the lenders decision. If you are considering a high rise buy to let it is best to discuss the location with the mortgage lender or surveyor in advance to ensure the location is acceptable. Buy to let lenders main concern is resale value and tenant demand. They are also concerned about the number and quality of other residence in the building. Since the Grenfell Tower fire many will also require additional reports regarding cladding construction and fire safety.
9. The rent doesn’t cover the mortgage
Most buy to let mortgage lenders are looking for the rent to exceed the monthly mortgage payment by a certain percentage and if it doesn’t, they will reduce the loan amount in line with this calculation. This may be 130% or 175% of the mortgage payment at a notional rate of 5% for example. Properties where the rent doesn’t cover the mortgage payment are considered higher risk as they are not self funding and the landlord will need to contribute each month. The minimum deposit for most buy to let mortgages is 25% of the purchase price. If the rent is low a deposit of 50% may be required.
10. Non-standard construction.
A standard property construction is considered to be brick or stone walls with a tile or slate roof. Non-standard construction types are timer-framed, concrete or other short-term materials that degrade over time. Buy to let mortgage lenders want to ensure the property is built to last and if high risk materials have been used in the properties construction they have been well maintained. If you are considering a non-standard construction buy to let please check with the lender or lenders surveyor first. They may require extra reports before they lend.
11. Ex-local authority properties.
Buy to let lenders may consider ex-local authority properties a higher risk for two main reasons. The construction of the property and the other occupants in nearby properties. Both of these issues can affect resale and tenant demand. The lender may want extra information regarding construction or want to know the percentage of nearby properties privately own and council owned.
12. Tenants claiming housing benefit or universal credit.
Tenant type can be an issue for some lenders and insurance companies. Generally, tenants claiming benefits are considered to be at higher risk of rent arrears or property damage. Some lenders will exclude this tenant type as a condition of mortgage offer.