New build buy-to-let mortgages

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New build buy to let mortgages

One option that is becoming increasingly popular among landlords and property investors is new-build buy to let mortgages. These mortgages are specifically designed for those looking to purchase newly constructed properties with the intention of renting them out. New build buy to let mortgages present unique opportunities, but also come with their own set of considerations and challenges. This guide will provide an in-depth look into the world of new build buy to let mortgages, helping you understand what they are, how they work, and how to navigate the application process to secure the best deal for your investment strategy.

What is a new build buy-to-let mortgage?

A new build buy-to-let mortgage is a type of loan designed for property investors looking to purchase newly built properties with the intention of renting them out to tenants. These properties could include new houses, flats, or apartments that have just been constructed or are still under construction.

These mortgages are specifically designed for buy-to-let purposes, which means the mortgage terms, interest rates, and requirements may differ from those of a traditional residential mortgage.

Just like regular buy-to-let mortgages, new build buy-to-let mortgages typically require a larger deposit, often around 25% or more of the property’s value, although this can vary by lender. Also, the interest rates can be higher compared to standard residential mortgages.

It’s important to note that not all lenders offer new build buy-to-let mortgages due to the perceived higher risks associated with new properties, such as potential construction delays or initial lower demand. Therefore, it is crucial to research the market thoroughly or consult a mortgage broker to find the most suitable deal for your circumstances.

As with any property investment, there are risks involved, and potential landlords should carefully consider factors such as location, demand for rental properties in the area, rental yields, and their ability to cover mortgage repayments even during periods when the property might be vacant.

How does a new build buy-to-let mortgage work?

A new build buy-to-let mortgage operates similarly to a regular buy-to-let mortgage, but it is specifically intended for properties that are newly constructed or still under construction. Here’s how it generally works:

1. Application and Approval: First, you apply to a lender who offers this type of mortgage. This typically involves providing information about your income, credit history, and sometimes your experience as a landlord. As these types of mortgages are considered higher risk, lenders may have stricter eligibility criteria.

2. Deposit: If approved, you’ll need to put down a deposit, which is usually larger than that required for a standard residential mortgage – typically around 25% of the property’s value, although it can be higher or lower depending on the lender and your circumstances.

3. Interest Rates and Repayments: The mortgage will have an interest rate that may be fixed or variable. Your monthly repayments will be determined by the amount you borrow, the term of the mortgage, and the interest rate.

4. Rental Income: The expectation is that you’ll rent out the property, and the rental income will cover your mortgage repayments and associated costs. Lenders usually require that the potential rental income be 125–145% of the mortgage repayments, but this can vary.

5. Property Management: As the landlord, you’ll be responsible for maintaining the property and dealing with tenants.

6. Mortgage Term: At the end of the mortgage term, which is usually between 25-30 years, you’ll be expected to have fully repaid the loan. If you sell the property before the end of the term, you’ll use the proceeds to repay the remaining balance on the mortgage.

7. Risks: As with any investment, there are risks. If you’re unable to rent the property, you’ll still need to make your mortgage repayments. There’s also the risk of property values decreasing, or unexpected costs associated with the property.

Can I get a buy-to-let mortgage on a newly build property?

Yes, you can get a buy-to-let mortgage on a newly built property, although it’s important to note that not all lenders offer these types of mortgages due to the perceived higher risks. These can include potential construction delays or the possibility of initial lower demand for the rental of new properties.

Lenders will look at your personal income, credit history, and sometimes even your experience as a landlord. A good credit score and a steady income can make it easier for you to secure a mortgage.

What are the eligibility criteria for a buy to Let mortgage for new builds?

The eligibility criteria for a buy-to-let mortgage for new builds can vary from lender to lender. However, there are some common requirements that many lenders will consider when assessing your application:

Age: Typically, you need to be at least 18 years old to apply for a buy-to-let mortgage. Some lenders also have an upper age limit, often around 70 or 75 at the end of the mortgage term.

Income: Many lenders require a minimum personal income, often around £25,000 per year, although this can vary. This is in addition to the rental income from the property.

Rental Income: As mentioned earlier, the expected rental income from the property must usually cover a certain percentage of the mortgage payments, often 125% to 145% or more. This is known as the ‘rental coverage ratio’.

Deposit: Buy-to-let mortgages usually require a larger deposit compared to residential mortgages. The minimum deposit is typically around 25% of the property’s value, but this can vary.

Credit History: Lenders will check your credit history as part of the application process. If you have a history of poor credit, it may be more difficult to secure a mortgage, but specialist lenders may still be available.

Property Type: Some lenders have specific criteria for new build properties. For instance, they might require a larger deposit or have restrictions on the type or size of the property.

Number of Properties Owned: If you already own four or more mortgaged buy-to-let properties, you will be classified as a ‘portfolio landlord.’ Lenders will assess your entire property portfolio when deciding whether to lend.

Residency: Many lenders require that you be a UK resident, although some may lend to overseas investors.

Is it difficult to get a buy-to-let mortgage on a new build?

Getting a buy-to-let mortgage on a new build property can be more challenging compared to getting a mortgage on an existing property, but it’s certainly not impossible. 

Despite challenges, it’s still possible to secure a buy-to-let mortgage on a new build property. It can be helpful to work with a mortgage broker who has experience in this area and can guide you through the process and potentially give you access to specialist lenders.

How much would it cost?

The cost of obtaining a new build buy-to-let mortgage includes both upfront and ongoing costs. Here are the key expenses you need to consider:

Mortgage Fees: These can include arrangement or booking fees (can range from £1,000 to £2,000 or a percentage of the loan), valuation fees (varies according to property value, typically a few hundred pounds), and potentially a mortgage broker’s fee if you use one. Some lenders may offer fee-free deals but these may come with a higher interest rate.

Legal Fees: You’ll need to hire a solicitor or licensed conveyancer to handle the legal aspects of buying a property. The cost can range from £850 to £1,500 plus VAT, depending on the complexity of the transaction.

Stamp Duty Land Tax (SDLT): In the UK, if you’re purchasing an additional property like a buy-to-let, there is a 3% SDLT surcharge on top of the standard rates. The exact amount depends on the property price.

Surveyor’s Fee: It’s a good idea to have a survey done on the property before you buy. For a new build, a snagging survey is often recommended, which can cost between £300 and £600.

Insurance: Buildings insurance is a requirement by lenders. You may also consider landlord insurance, which can cover rent guarantee insurance, landlords’ contents insurance, and liability insurance.

Ongoing Costs: Remember, there are also ongoing costs like property maintenance, service charges (especially if it’s a flat), letting agency fees, and potential periods of vacancy.

Getting a mortgage on a property that’s off-plan

Getting a mortgage for an off-plan property, such as a new build property that hasn’t been built yet, requires a specific process and comes with unique considerations. Here’s a step-by-step overview:

Reservation: After identifying the property you wish to purchase, you’ll typically need to pay a reservation fee to the developer, which is often around £500–£2000. This fee should be subtracted from the final purchase price.

Mortgage Agreement in Principle: Before fully committing to the purchase, it’s wise to get a mortgage agreement in principle from a lender. This is a statement from a lender saying that they would, in principle, lend a certain amount to you based on your financial circumstances.

Mortgage Application: When you’re ready to proceed, you’ll complete a full mortgage application. Remember, many lenders will only hold a mortgage offer for a certain period, usually between three to six months. If the property won’t be ready within this time frame, you may need to reapply for the mortgage later on, or find a lender who offers a longer validity period.

Exchange Contracts: After your mortgage offer is confirmed, you can exchange contracts with the developer. At this point, you’ll typically need to pay a deposit, which can be around 10–20% of the purchase price.

Building Completion: Once the property is built and ready, your lender will typically conduct a final valuation to ensure the property is worth the amount they’ve agreed to lend you. If everything is in order, you can proceed to the completion stage, where the remaining funds are transferred to the developer.

Completion and Moving In: After completion, the property is officially yours. You can then move in or start preparing the property for rental, depending on your plans.

Note: Buying off-plan carries certain risks, such as construction delays or the property’s value decreasing before you’ve completed the purchase. It’s important to do thorough research and consider seeking advice from a property solicitor or a financial adviser before proceeding.

Advantages of buy to let mortgages on a new build 

Investing in a new build property with a buy-to-let mortgage can offer several advantages:

Modern Standards and Appeal: New builds are constructed to the latest building regulations and typically include modern amenities and design features, which can make them appealing to potential tenants. Energy-efficient properties can also attract environmentally conscious renters and lower utility bills.

Less Maintenance: New build properties should require less maintenance and repairs than older properties, at least in the first few years. This can save you time and money and provide a better experience for your tenants.

Warranty Protection: New builds often come with a warranty (like the NHBC 10-year warranty in the UK), which can cover certain defects and structural problems. This can provide peace of mind and potential cost savings.

Potential for Growth: If the property is in a new development area with planned infrastructure improvements, there could be potential for property value and rental income growth over time.

Incentives: Developers may offer incentives such as discounts for early buyers or including fixtures, fittings, and appliances, potentially saving you money on initial setup costs.

Off-Plan Purchase: If you purchase off-plan (before the property is built), you might be able to secure the property at a lower price than when it is complete. However, this comes with its own risks, including construction delays.

Disadvantages of buy to let mortgages on a new build 

While investing in new build properties with a buy-to-let mortgage can offer certain advantages, there are also potential downsides to consider:

Premium Pricing: New builds often come at a premium price compared to older, existing properties of similar size and location. This can mean a higher initial investment and potentially a higher mortgage.

Depreciation: Similar to a new car, a new build property can depreciate in value in the first few years, especially if it was bought at a premium.

Construction Delays: When buying off-plan, construction delays are a common risk. This could postpone the point at which you can start earning rental income.

Unestablished Areas: New developments are often in areas without established communities or local amenities. This could affect rental demand initially until the area becomes more established.

Leasehold Issues: Many new builds (especially flats) are sold as leasehold rather than freehold. This can involve ongoing costs, such as ground rent and service charges, and potential difficulties with leasehold management.

Mortgage Challenges: Some lenders are cautious about offering buy-to-let mortgages for new build properties, particularly flats. This could limit your financing options or require a higher deposit.

Initial Void Periods: If the new development isn’t fully occupied or lacks a sense of community, it may take longer to find tenants, and you may experience initial void periods.

How much deposit will I need for a buy-to-let on a new build?

The amount of deposit required for a buy-to-let mortgage on a new build property can vary depending on the lender’s criteria, your financial circumstances, and the specifics of the property. However, it is generally higher than for a residential mortgage due to the perceived higher risk associated with buy-to-let properties.

As a guideline, most lenders in the UK require a minimum deposit of around 25% of the property’s value for buy-to-let mortgages. Some might offer mortgages with a lower deposit, but this could lead to higher interest rates and potentially more stringent eligibility criteria.

In the case of new build properties, some lenders may ask for a larger deposit, potentially up to 30% or more. This is because new builds, especially flats, are sometimes seen as riskier due to factors like potential initial depreciation or slower sales rates in the development.

What is the difference between a BTL mortgage and a buy-to-Let mortgage new build?

A Buy-To-Let (BTL) mortgage and a Buy-To-Let New Build mortgage essentially serve the same purpose: they’re both designed for property investors who intend to rent out the property rather than live in it themselves. The key difference lies in the type of property being purchased.

A standard Buy-To-Let mortgage can be used to purchase any type of property intended for rental, including existing residential properties (houses, flats, etc.).

A Buy-To-Let New Build mortgage, on the other hand, is specifically intended for the purchase of newly constructed or off-plan properties. These are properties that are brand new, recently completed, or in some cases, not even built yet.

How does affordability work for new build buy to Let mortgages?

The affordability assessment for a new build buy-to-let (BTL) mortgage works in a similar way to a standard BTL mortgage. Lenders primarily focus on the potential rental income from the property rather than the borrower’s personal income, which is the case for a standard residential mortgage. However, they will also consider your personal financial circumstances.

With new build properties, lenders may take into account additional factors, such as the developer’s reputation, the property’s warranty, and the specifics of the development.

What do I need to earn to apply for buy-to-let mortgages for new-build flats?

When applying for a buy-to-let mortgage for new build flats, lenders will primarily focus on the potential rental income from the property rather than the borrower’s personal income. However, many lenders still require the borrower to have a minimum level of personal income.

While this requirement can vary between lenders, a common threshold is around £20,000–£25,000 per year, which is as same as normal buy to let mortgage. This income can come from employment, self-employment, pensions, or other reliable sources. The purpose of this requirement is to ensure that you have a stable financial situation outside of your rental income.

Are buy-to-let mortgages for new-build flats an investment opportunity?

Investing in new build flats with a buy-to-let mortgage can potentially be a good investment opportunity, but like all investments, it depends on a variety of factors. 

Research the local rental market to assess demand. New build flats can be attractive to certain groups of tenants, such as young professionals or small families, especially if they’re close to amenities like shops, restaurants, and transport links.

Investing in property should be viewed as a long-term commitment. It’s essential to do thorough research, potentially enlist the help of professionals, and consider seeking advice from a financial advisor or property investment expert before making any decisions. Also, keep in mind that property prices can go down as well as up, and you may not get back the amount you initially invested.

How a buy-to-let broker can help

A buy-to-let mortgage broker can provide valuable assistance in navigating the complexities of property investing, especially for first-time landlords or those looking to expand their property portfolio. Here’s how a broker can help:

1. Access to a Wide Range of Lenders and Products: Brokers have access to a vast array of mortgage products, including those not directly available to the public. This can ensure that you get the best deal available based on your specific circumstances.

2. Expert Advice: Brokers have a deep understanding of the mortgage market and can provide advice tailored to your specific needs and financial situation. They can help you understand the potential risks and rewards of buy-to-let property investing.

3. Time and Effort Saving: A broker will handle the legwork, from gathering necessary documentation to completing the application process. They can liaise with lenders, solicitors, and estate agents, saving you time and effort.

4. Better Deals: Given their vast knowledge of the market, brokers can negotiate better terms, rates, or fees on your behalf.

5. Navigating Complex Situations: If you have unique or complex financial circumstances, a broker can be especially helpful. They can find lenders who specialise in non-standard cases, such as self-employment, bad credit, or portfolio landlords.

6. Regulatory Protection: The Financial Conduct Authority (FCA) in the UK regulates reputable mortgage brokers. They are required to provide advice that is in your best interest, and you have recourse to the Financial Ombudsman Service if something goes wrong.

7. Assistance with New Builds: When it comes to buy-to-let mortgages for new builds, brokers can guide you through specific issues such as longer completion timescales, developer incentives, and warranty requirements.

Which lenders offer this?

Many lenders in the UK offer buy-to-let mortgages for new build properties. These include major high-street banks, building societies, and specialist lenders. However, the specifics can change over time, and the best lender for you will depend on your individual circumstances, including your income, credit history, the property, and the size of your deposit.

Some lenders that have historically offered buy-to-let mortgages for new builds include:

1. Barclays: Offers buy-to-let mortgages for new builds, with a range of fixed and tracker rate products.

2. NatWest: Provides buy-to-let mortgages for new builds, but may have specific criteria for these properties.

3. Leeds Building Society: Known for a broad range of mortgage products, including buy-to-let for new builds.

4. BM Solutions (part of Lloyds Banking Group): Offers buy-to-let mortgages for various property types, including new builds.

5. The Mortgage Works (part of Nationwide Building Society): Specialises in buy-to-let mortgages and has been known to lend for new builds.

6. Paragon: A specialist lender offering buy-to-let mortgages for a range of property types and landlord circumstances, including new builds.

Please note that the specifics of the mortgage offer, such as the interest rate, the loan to value ratio (LTV), and any fees, will depend on a variety of factors, including your financial situation, the expected rental income from the property, and the specifics of the new build property itself.

What are new build buy-to-let mortgage rates?

The mortgage rates for buy-to-let properties, including new builds, can vary widely depending on a range of factors, including the lender’s criteria, the type and value of the property, the expected rental income, your credit history, the size of your deposit, and the current state of the market.

Typical buy-to-let mortgage rates in the UK ranged from around 1.5% to 5% or higher. However, these rates can change over time due to factors such as shifts in the economy, changes in the Bank of England base rate, and lenders’ business strategies.

New build properties can sometimes come with higher mortgage rates due to the perceived higher risk, especially for flats. This is because new builds can sometimes depreciate in value in the first few years, or sales rates in the development may be slower than expected. However, this isn’t always the case, and many lenders offer competitive rates for new build buy-to-let mortgages.

Can you get a buy-to-let mortgage if you’re a property developer?

Yes, property developers can indeed get buy-to-let mortgages, but the process may be different than for individual investors or landlords. Many property developers choose to take out a buy-to-let mortgage if they plan to retain some or all of the properties they’ve developed to rent out for income.

However, there are some considerations and potential challenges:

Scale of Development: Lenders might categorise property developers differently based on the size and scale of their operations. Those with larger portfolios or more significant projects might be seen as commercial borrowers rather than individual landlords.

Type of Mortgage: Property developers often use a range of financing options depending on the stage of the development. For example, they might use a development loan or bridging loan during the construction phase and then switch to a buy-to-let mortgage once the property is ready to be rented out.

Lending Criteria: As with all mortgages, lenders will have specific criteria that borrowers must meet. For property developers, this could include demonstrating a track record of successful projects, providing details of the rental market for the property, and meeting certain financial criteria.

Portfolio Landlords: If you already own four or more mortgaged buy-to-let properties, you will be classified as a ‘portfolio landlord.’ Lenders will assess your entire property portfolio and your experience as a landlord when deciding whether to lend.

It’s worth noting that specialist lenders or commercial banks might be more suitable for property developers, especially those with larger-scale projects. These lenders will have experience with development finance and can provide products tailored to the needs of property developers.

Can I remortgage a buy-to-let property with bad credit?

Yes, it is possible to remortgage a buy-to-let property even if you have bad credit, but it might be more challenging, and your options may be more limited. Here’s what you should know:

Specialist Lenders: Not all lenders will be willing to offer a remortgage to someone with bad credit, but there are specialist lenders who cater to this market. These lenders often have more flexible lending criteria, but they may charge higher interest rates or require a larger deposit to offset the risk.

Credit Issues: The nature and severity of your credit issues will have an impact. For instance, a lender might view a missed credit card payment more leniently than a bankruptcy or repossession. The more recent the issue, the more impact it is likely to have.

Loan to Value (LTV): You may have more options if you have a significant amount of equity in your property. A lower LTV ratio (meaning you own a larger proportion of your property outright) can make you a less risky prospect to lenders.

Rental Income: Lenders will look at the rental income from the property. If the rental income comfortably covers the mortgage repayments (typically by 125–145%), lenders may be more willing to consider your application.

Personal Income: Some lenders might also consider your personal income, although this is less common for buy-to-let mortgages.

Professional Advice: Because this can be a complex area, it’s often a good idea to speak with a mortgage broker who specialises in bad credit mortgages. They can help you understand your options, suggest suitable lenders, and guide you through the application process.

How to start your mortgage application

Starting a mortgage application, whether it’s for a residential or buy-to-let property, involves several steps. Here’s a general guide to the process:

1. Evaluate your finances: Determine what you can afford. Look at your income, savings, and current expenses. For a buy-to-let mortgage, you’ll also need to consider the potential rental income from the property.

2. Check your credit score: Your credit history is a crucial factor for lenders when assessing your mortgage application. Make sure to check your credit report for any errors or issues that could impact your application.

3. Gather necessary documentation: You’ll need to provide a variety of documents as part of the application process. These can include proof of income (like payslips or tax returns), bank statements, identification, proof of address, and details of your current financial obligations.

4. Choose a mortgage type: Consider what type of mortgage is right for you. This could be a fixed-rate mortgage, where the interest rate stays the same for a set period, or a variable-rate mortgage, where the rate can change.

5. Speak to a mortgage broker or advisor: They can provide advice tailored to your circumstances and help you navigate the process. They have access to a range of lenders and mortgage products and can help you find the best deal.

6. Get a Decision in Principle: Also known as a mortgage in principle, this is a written estimate from a lender stating how much they may be willing to lend you. It’s not a guarantee, but it can be useful when you start property hunting.

7. Find a property: Once you have an idea of your budget, you can start looking for a property. For a buy-to-let mortgage, you’ll also need to consider the potential rental yield, tenant demand, and other factors relevant to landlords.

8. Full mortgage application: Once you’ve had an offer accepted on a property, you can proceed with the full mortgage application. This will involve providing more detailed information and documentation. The lender will also arrange a valuation of the property.

Finding the best buy to let mortgages for new build

Finding the best buy-to-let mortgage for a new build property involves various steps and considerations. Here are some tips to help you navigate this process:

Understand your needs and circumstances: Start by evaluating your financial situation, including your income, credit score, and the amount you can afford for a deposit. Also, consider your goals for the property, such as the rental income you expect to receive.

Research the market: Understand the current state of the mortgage market. Look at interest rates, lender terms and conditions, and the types of mortgages available. This will give you a sense of what to expect and help you identify potential deals.

Use comparison websites: Mortgage comparison websites can be a useful starting point to compare different mortgage deals. They can provide a broad overview of the mortgages available, including interest rates, fees, and terms.

Consult a mortgage broker: A mortgage broker can provide tailored advice based on your individual circumstances. They have access to a range of lenders, including some specialist lenders who may not directly deal with the public. They can help you understand your options and identify the most suitable mortgage for you.

Consider new build specialists: Some lenders or brokers specialise in new build properties. These specialists may have more experience with the unique considerations of new builds, such as the longer timescales often involved in purchasing a new build property.

Check lender criteria: Each lender will have specific criteria for buy-to-let mortgages on new builds. These may include restrictions on the type or size of the property, the minimum rental income, and the maximum loan-to-value ratio. Make sure you understand these criteria before applying.

Review the total cost: When comparing mortgages, consider the total cost, not just the interest rate. This should include any fees, the term of the mortgage, and the type of interest rate (for example, fixed or variable).

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