In the UK, there are several different types of mortgages. Since mortgages are long-term debt instruments, it only makes sense that you might need to change your type of mortgage several years in. One of the most common mortgage switches is changing from a residential mortgage to a buy to let mortgage.
How and if you are able to switch mortgages typically depends on the current terms and type of mortgage you are in, as well as your lender. But you generally do have options to make a switch if the details align to do so.
In this guide, we will cover these two mortgage instruments, walk you through switching from one to another, and share the details you can expect as you experience the process.
What is a Residential Mortgage?
Let’s start with the banks and differentiate between the different types of mortgages in this guide.
The first is a residential mortgage. This mortgage is the type of mortgage you get when you purchase a property to use as a primary residence.
So, a person or a group of people who are purchasing their home would use a residential mortgage. This mortgage does require that the home it is tied to be used for a residence by the mortgage holders. This means if you decide to move, you can’t rent the home out to others.
Residential mortgages cover buyers who are purchasing a residence for the first time as well as those who may be moving homes and those who want to remortgage for better rates or financial reasons.
Residential Mortgage Terms
Residential mortgages are not quick loans that you pay off in 5 years for most people. These loans can be as long as 30 years, which means you’re going to be paying for that residence for many years to come. The residential mortgage repayment is typically 25-30 years, although it is possible to get them for less time in some cases.
In addition, there are lenders that might have restrictions on age limitations, which could determine how long of a loan you are allowed to take. This is generally specific to higher ages, where a lender might say your mortgage can’t extend past age 75.
So if you are 50 and getting a residential mortgage, then they won’t allow a term of 25 years. And if you are 60, then your maximum term allowance would be 15 years.
This can vary from lender to lender but it’s certainly something to be familiar with.
Residential mortgage interest rates can be established through fixed rate, tracker, or variable rate notes. These terms define how the interest will work. For example, a fixed-rate mortgage might be fixed for the entire term, or it may be fixed for a set number of years.
Tracker mortgages track against an index, and variable rate mortgages can be adjusted at set times throughout the time of the mortgage.
What is a Buy to buy-to-let mortgage?
A buy to let mortgage is the opposite of a residential mortgage. Where a residential mortgage is meant to be lived in by the buyer, a buy to let mortgage is set up for the intent to rent out the property. This mortgage is set up completely differently from a residential mortgage, and your payments will probably be interest only for a specified time frame.
If you were in a residential mortgage but you move out and decide to rent the property, you likely will need to check into converting our mortgage.
Or if you are purchasing a home or property with the intent of renting it or leasing it, then you will need a buy to let mortgage instead. These two mortgage categories have very different purposes.
While both of these are mortgages intended for the purchase of a property, it’s the expectations behind the mortgage and the purpose for the mortgage that make them different.
Buy to Let Mortgage Terms
One of the major differences between a residential mortgage and a buy to let mortgage is how you repay them. The repayment terms of a buy to let mortgage are typically set up where you are only required to pay the interest as your payment. Then, the mortgage will have a set ending date and the mortgagee is expected to pay the principal remaining at that time.
If you can’t pay the principal then, you can remortgage the note, sell it, or look for alternative solutions. It’s best to make payments towards the capital over time even though it isn’t part of the required payment.
When qualifications are considered for a buy to let mortgage, there are things they look at to determine if it’s a good fit. Most lenders require you to have anticipated rental income that will cover anywhere from 25-45% of monthly mortgage repayment needs.
The requirements to get a buy to let mortgage are often more stringent than getting a residential mortgage.
Why Would You Switch from Residential to Buy to Let?
In most cases, people purchase their residence and plan to stay there for many years to come. They choose the home of their dreams in a location that they love and then they work to make that their home.
They raise their family there and stay in that spot until much later in the future, or even until they pass away some day.
However, even when we sometimes think our lives will never change paths, life can surprise us. When life surprises a person, they might have to pack up and move. And then what do they do with this house that is supposed to be their residence?
They could rent it out as a residence, but they could have some issues if they were found out. When this happens, they need to convert the loan so that it is set up properly.
Even though in this example, they never intended to leave the home, life came up and threw a kink in their plans. Now, instead of living in that residence forever, they have to make a change.
This could be because of a job offer, a life change, or even a family change. There may be something like divorce or sickness that interferes with the initial plans to stay in that home forever.
Because the residential mortgage terms state that this is your primary residence, you are stuck in a hard position. If you choose to move and then look to purchase a new home in your new location, you will have to convert this home before you can get another residential mortgage.
When you move from your residence, you have two options. You can work with your mortgage lender to do a consent-to-let agreement, or you can convert the mortgage to a buy to let mortgage.
Consent to Let Agreement
If you don’t want to go through the hassle of converting your mortgage from residential to buy to let, you can work with your lender to establish a consent to let allowance. This is a written agreement established between you and the lender that says they know you are not currently in the home and you can rent it out for a set timeframe.
The consent to let agreement is monitored by the lender and generally is meant for a short-term allowance of you renting out the property in question. Perhaps in a scenario where you are travelling or working somewhere else. Or even as a temporary solution until the mortgage can be fully converted for long-term needs.
The consent to let agreement is generally only used for short-term needs and not meant to last forever.
Buy to let Mortgage
In contrast, the buy to let mortgage is the long-term solution for someone who cannot remain in the residence and has no intent to return to the residence as their primary home. While you can use the consent to let agreement temporarily, it won’t last forever so you will likely need to consider your options to convert the mortgage.
The difference in the agreement and the mortgage change is that the mortgage is long-term and the agreement is a short-term provision from your lender.
Converting Your Residential Mortgage to a Buy-to-Let Mortgage
Now, let’s talk about the process. For whatever reason, you’ve run into a scenario where you need to move out of your primary residence and you’re going to need to rent it out while you are gone.
Will you be coming back to this residence within a year or two or is your intention to make a long-term or permanent change? In some cases, it may be advantageous to sell the residence rather than worrying about the mortgage conversion.
This may depend on your situation.
There are several different details to be aware of as you work to convert your loan. For example, the qualifications for a buy to let mortgage are more stringent and you will have to be able to meet those requirements in order to convert.
However, the benefit of changing to a buy to let is that you can take out the equity you’ve built up right away, instead of waiting for a sell. Then, you can use that equity to purchase a new residence elsewhere.
You will need to work closely with a broker that handles these conversions in order to change your residential mortgage to a buy to let mortgage. Check with your current lender or do research to find the best fit.
Residential Mortgage Qualifications
When you applied for and were granted your residential mortgage, you had to meet some qualifications and they may have felt stringent at the time. You likely had to provide a ton of financial information and be able to provide some money down towards the purchase.
These are the basic qualifications for a residential mortgage.
- Determining how much you can borrow
- Having an initial deposit to make a payment towards the home value
- Bank statements
- Passing credit score
- Ability to pay required fees for valuation, survey, legalities, etc.
- Earned wages that are dependable
Buy to Let Mortgage Qualifications
In contrast, a buy to let mortgage is going to have many of these same qualifications, but there are going to be additional requirements. Not only do you need to have the financial stability to make this purchase, but they want to ensure you can get a specific amount of rent to cover a percentage of your payments. There are some other fees to be aware of too.
These are the basic qualifications for buy to let mortgages.
- Current debt status
- Earned income
- Initial deposit of 20-40% of value
- Have a home or in possession or have a partially paid mortgage
- Meet the necessary age requirements or limitations
- Passing credit score
- Financially able to take on risk
- Ability to recoup a portion of monthly payments through rental receipts
Buy to Let Mortgage Costs
If you’re converting to a buy to let mortgage, you’re already familiar with the costs of a residential mortgage. You’ve already been through those costs and established yourself in a position to handle them. You will have costs for the conversion of this mortgage, as well as additional costs that are specific to a buy to let scenario.
Let’s take a look at some of the associated costs.
- Legal Fees: All paperwork for your buy to let mortgager will need to process through a licensed individual, such as a solicitor or conveyancer. This individual or firm is going to charge their own fees for the processing and the paperwork.
- Product Fee: The product fee is a specific fee for securing a mortgage for your needs. You paid a product fee for your residential mortgage, but they are slightly higher for buy to let mortgages.
- Agency Fees: This fee may not be applicable to all. It is a fee specific to any agency you might use to manage the rental property underneath the mortgage.
- Inspections: Your property is going to require a safety inspection and you may have to plan on these inspections regularly. It is your responsibility to ensure the tenants in the home are safe so there will be initial inspections as well as required annual inspections that need to be done.
- Survey Fees: the residence will need to be surveyed by a professional. The surveyor inspects the property for any concerns or structural issues to ensure that the property can be sold.
- Stamp Duty: Stamp duty is a rate that you pay for having a residence. When your residence is rented out, you pay the typical stamp duty rates, but you will also be required to pay an additional 3% on your stamp duty for having a rental residence.
- Energy Efficiency Certification: Landlords are required to have energy efficiency certified for the property. This will need to be done right away and then when your certificate expires. Most certificates are good for 10 years at a time. You may be required to make changes to have a sufficient rating for your rental property.
- Landlord Insurance: You are required to insure your property against any potential damages that could occur. As a homeowner, you might consider homeowner’s insurance. As a landlord, you will have landlord insurance, which is specialty coverage specific to landlords. This protects against damages from tenants, eviction expenses, and failure to pay rent. This is not required but is highly recommended in the industry.
Tax Implications of a Buy to Let Property
Owning a buy to let property may have some tax implications to be aware of. Your stamp duty requirements will increase, but you also may have tax liability because of the income you receive for rent. You are required to claim this rental income and it is taxed at whatever marginal rate you fall into.
It is possible that your rental income will push you into a different tax margin as well, so be aware are of this. Thankfully, landlords have the ability to deduct expenses, which can help to manage those tax implications. These are some things you may be able to deduct.
- Agent fees
- Repairs
- Associated bills
- Landlord insurance
- Council tax
At one time, you could deduct mortgage interest, but this has since changed. Keep in mind as well that if you choose to sell the property, you may have capital gains implications too.
Is Converting Your Mortgage Your Only Option?
The most common means of covering your mortgage when you have to move or leave the property for some reason is to convert your mortgage to a buy to let type.
However, that’s not your only option. Your options are more limited because the lender is ultimately in control of the use of your home and you have to be able to work with their requirements.
You can basically do one of these three things.
- Sell the property.
- Work with the lender for consent to let (less than 12 months).
- Convert to a buy to let mortgage.
Work with your lender to determine the best fit for your needs.
Final Thoughts
Converting from a residential mortgage to a buy to let mortgage isn’t overly complicated. The challenges come in the form of qualifying for a buy to let mortgage. Whether or not you can qualify will depend on how long you’ve had the home, what your debt looks like, and whether you can truly support the rental property as required.
Take the time to have a conversation with your current lender or shop around for alternative lenders to find the best solution.
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