With a buy-to-let mortgage you can earn money and make a return on your investment. Many of our relations therefore want to take out a buy-to-let mortgage in order to be able to rent out a property. This often starts with the house in which you currently live. As soon as a new home has been found, it is the intention to keep the home where one has lived and to rent it out. In other words leave-to-let or keep-to-let. Another common situation is the purchase of a new home that is immediately intended for rental. With a regular home mortgage, it is only possible for the owner to live in the home himself. Because of the rent clause in the mortgage deed, letting is not allowed.
Fortunately, there are now several mortgage lenders that offer a buy-to-let mortgage. This product is also referred to as a real estate mortgage, investment mortgage or abbreviated to BTL by some mortgage providers.
What is a buy-to-let mortgage?
The buy-to-let mortgage has the following properties and is characterized by the purpose that the real estate financing is used for renting out the home to third parties. The house must be rented out or will be rented out in the future. With a buy-to-let mortgage, you are not allowed to live in the house yourself. Renting out to your own children, for example renting a room in a student house, or renting it out to family, such as parents, by buying their home is often possible.
You use a buy-to-let mortgage to make a return by renting out a home. You see the house as an investment instead of a nice place to live. On the one hand, you will receive rental income on a monthly basis and on the other hand, there may be a large return if you sell the property in due course. One option is to buy the house before the children go to study in a large city in the Netherlands. That way, the children and any friends who are also going to study do not have to look for a student room. Another option is to rent out to expats. On the basis of a good strategy, buying real estate for rent to a specific target group, such as students, expats or young professionals, may suit you.
Convert your home mortgage to buy-to-let mortgage
Many of our customers want to be able to rent out an owner-occupied home. One option is to convert your existing mortgage as soon as you buy a new house and want to keep your current apartment for rent. It is certainly advisable to do this. If the house is rented out without permission, this poses a great risk. When the lender finds out, the lender can demand the entire mortgage or sell the house because of the right to immediate foreclosure without the intervention of the court and recover all costs involved. The mortgage deed contains a piece about the rent clause. This shows that according to these conditions, the mortgage lender must always give written permission for rental. Even if it is only for a weekend via the AirBnB website, the provider sees this as home rental.
Use the surplus value of your own home
If you already have your own home and this house is currently worth more than the mortgage on it or the house is now mortgage-free, it is sometimes possible to increase the mortgage. This can be increased to a maximum of the current market value. You can use the amount you borrow in this way to buy a new home, which you can then rent out. It is possible to combine the purchase with a buy-to-let mortgage. If you have enough capital yourself, you can also ‘mortgage’ the purchase of real estate later. In this way you can further strengthen your portfolio and spread your opportunities and risks well.
Interest rates buy-to-let mortgage
Due to the arrival of several providers and the resulting competition, the interest on the rental mortgage has fallen sharply since the introduction of the rental mortgage in 2016. The mortgage interest rate for a residential mortgage is normally a lot lower in relation to the interest rate for a rental mortgage. . As you can see from this, the mortgage interest on the rental mortgage is higher than the interest you have to pay for a mortgage on your owner-occupied home. The advantage is that the conditions are more flexible and there are interesting options. For example, 50% of the real estate financing can often be set up by means of an interest-only mortgage. Based on your wishes, the buy-to-let mortgage conditions that you consider important and the chosen fixed-rate period that you want, an indication can be given of the interest and associated charges that will apply to you. To assess to what extent investing in real estate is interesting for you, there is a rule of thumb: The return on an investment in rented real estate, such as a home, is higher when you invest more of your own money. Get good advice before you start investing in real estate, gather information yourself and put together a team that can guide you well.
Consumer with real estate investment or professional investing in real estate
It is very important whether you are going to invest in real estate as a consumer or whether you are going to buy a home as a professional and then rent it out. A professional real estate investor is less well protected. A consumer falls under the Dutch Authority for the Financial Markets (AFM) and that is not the case for the professional. When you take out a BTL mortgage as a consumer, your income is tested similar to a regular mortgage. Under certain conditions, the rental income or future income from the rental of the home is also examined. In the case of a commercial rental mortgage, it is mainly assessed what the rental flow looks like. The business case is carefully considered.
In the market there are providers of buy-to-let mortgages that focus exclusively on professionals. There are also mortgage lenders that only focus on consumers who, for example, buy a property to rent out to family. Some parties focus on both markets and are aimed at both the commercial rental mortgage market and that of consumers.
When are you seen as a business or professional real estate investor?
Once you have 5 privately owned properties, most lenders will qualify you as a professional or someone who is involved in real estate business. There is no law for this. The lenders have their own acceptance conditions that determine whether you can be seen as a business party. If you own more than 5 homes or have plans to own 5 homes in the near future, most providers of rental mortgages aimed at consumers will not help you. Financing your plans will have to take place in the business market. Based on a numerical substantiation, it will then have to be shown that you have sufficient own resources to finance the required own contribution. As soon as your box 3 income from rental is more than 30% of your total income, or the rental income is now more than 40,000 euros per year, that can also be a reason to consider your activities as business. At this size, it can no longer be a hobby and it starts to look like a business.
Valuing the market value of rented real estate
The market value of a property for rental will have to be determined by an independent appraiser. A valuation report is also required for rented property, so that the lender has a good idea of the market value of the collateral. It is required to determine the market value and especially the market value in rented condition. Usually the market value of a property in rented condition is an amount of approximately 75% to 100% of the amount paid for the property. The purchase price is therefore not leading for the financing. A professional appraiser determines the market value and will determine the correct value based on all kinds of factors. The person will look at the speed and possible rent of the property within the relevant region. The aesthetic aspects of the home, WOZ value and the energy label can also be important for the appraised value of the property.
Because every provider has the requirements of a valuation report and also which appraisers are actually allowed to value it, it is advisable to coordinate the valuation of the property with us in advance. The valuation of the market value also determines what the financing plan will look like. To ensure that the application runs smoothly, it is useful to have Bliss supervise the valuation. In this way we also know with which party the mortgage is taken out and then we put the right appraiser to work for you. Due to the expertise required and the amount of work involved, the cost of a valuation report for a commercial buy-to-let mortgage is higher than for a mortgage intended for consumer rental.
Contribute your own money
Buying a property to rent out provides the best return when you contribute your own money. The required own money has to do with the requirements set by the lender. There are now mortgage lenders, where a maximum of 90% of the market value may be borrowed in a rented state. By default, most lenders work with financing up to 80% of the market value. A low valuation of the property can mean that you have to contribute more of your own money. When the value is fairly low, you can therefore borrow much less. In this situation, your own contribution will be more to cover the purchase price and additional costs for the buyer, such as transfer tax (often 2%), brokerage or application fee for a deal sourcer, notary fees, valuation and consultancy fees, and so on. You will have to invest 36% of the purchase price yourself, plus additional costs if it is valued at 80% of the purchase price. In this situation you can borrow about 80% of 80% or 64% of the purchase price. You will have to enter the remainder in a different way.
Maximum buy-to-let mortgage
In order to calculate the maximum buy-to-let mortgage, it is also important not only to look at the value of the collateral. The income from the rental and the income are also important to know how much you can get in mortgage. An advisor at Bliss can provide you with a tailor-made calculation, so that you can find out how much you can borrow as a consumer on rental mortgage.
To determine a business mortgage, the rental income is looked at. Your personal situation is much less important here than the business case. The expected rental flow in relation to the interest and repayments is decisive. This factor is called the debt service coverage ratio (DSCR). With regard to supply, providers make sure that this ratio looks healthy. In practice, this means that the DSCR must be at least 1.25 to 1.5. Many lenders look for extra security and require you personally to have an average income. As a result, if the risk of loss of rental income arises, the business mortgage costs can still be paid in an alternative way.
Interest-only buy-to-let mortgage
Often a loan part can be borrowed by means of an interest-only mortgage. Many lenders offer the option of borrowing 50% of the market value with this mortgage type. As soon as you borrow more, the remainder of the mortgage will often be repaid with an annuiteitenhypotheek, although linear repayment is also possible. It is important to work out a good strategy before starting a financing plan. If you are planning to build up a substantial real estate portfolio and to buy and finance several homes, it is interesting to have the monthly costs as low as possible. This creates scope for possible follow-up financing. The monthly costs when testing a next mortgage are of great importance. It is therefore useful to make a good investment plan in advance if you want to invest smartly in real estate. By betting on the correct repayment form, you are taking an important step to be able to finance multiple homes in the future. The mortgage deed usually states that you can repay 10% of the total loan amount without penalty. This is the case even if you opt for an interest-only rental mortgage. 10% of the principal is of course a considerable amount that can be repaid without having to pay the provider a fee. An advisor at Bliss can advise you about the possibility of penalty-free repayment and other fine print of the rental mortgage. The conditions are certainly just as important as the price of the rental mortgage.
Fiscal aspects of housing rental and financing
Because of the attractive conditions, many real estate investors opt for box 3 when buying and financing a property for letting. If you are going to invest in real estate, it is important to agree with a tax advisor what is the most favorable thing to do in your personal situation. It is also possible to pre-sort on possible plans of the government. Many Bliss customers are currently opting to buy as a box 3 home. In that case, the value of the rental home is added to your box 3 capital base. The box 3 loan may be deducted from this. As a result, you do not have to pay tax on the rental income received. Get good advice on this from a tax specialist.
Risks buy-to-let mortgage
Investing in real estate is a good choice, given the limited risks of this asset class. Certainly compared to shares and crypto, a real estate investment gives more peace of mind and security. Before you start buying your first real estate, it is important to be aware that a buy-to-let mortgage also has disadvantages and risks. Some of these risks are listed below, although other risks may also arise.
Bu-to-let mortgage interest is rising
Fixing the interest rate on your buy-to-let mortgage for a short period of time creates more uncertainty. Not every investor and plan benefits from this. As soon as the period for which the interest has been fixed expires, the provider will make you a new offer. With the new interest rate offer, the price of borrowing can suddenly rise sharply. A higher interest rate is a risk to be taken into account. It is important that the rental income is sufficient to also be able to pay rising monthly costs due to the higher interest rate. If you have insufficient income in this situation, it will no longer be possible to close the gap. The lender’s right of execution is a security of the lender from which you do not want it to be invoked. Forced sale of the collateral can be a very unpleasant consequence.
Depreciation of rented property
The price of real estate is determined by supply and demand. Other factors may also apply, as a result of which the market value of real estate will increase or decrease in value. The risk of a residual debt is important to take into account.
In times of crisis, the market value may fall below the level of the existing mortgage. Having to sell the property in such times can lead to undervalued value.
No rental income or lower rental income
Not every tenant neatly pays the full, monthly rent. Strict selection at the gate prevents problems afterwards. Using a good rental agent for the screening of candidate tenants is certainly recommended.
It can also happen that you are temporarily unable to find a tenant. Sometimes it is necessary to rent out for a certain period at a lower rent.
Good cover of risks
With good home insurance you can cover fire and other risks that you cannot or do not want to bear yourself. It is therefore very important that your real estate has proper protection, because when your real estate burns down, the rent also disappears, but the mortgage payments continue. Always make sure that you have properly insured the rented property. Also make sure that the policy is actually paid. The insurer has policy conditions for a home insurance policy. It is important here that the risk bearer agrees to letting the home.
If the Owners’ Association (VvE) or others have arranged the policy, it is important to check the insurance carefully. Allowing rental by the VvE and the presence of sufficient cover is also important to check.
Risks in government policy and ‘regulatory risks’
Municipalities are at their wits end because of the housing shortage. Short-term decisions by governments often lead to negative consequences for the real estate investor.
There is a serious shortage of suitable housing and this will increase further in the coming years. Due to political pressure, the government is changing rules to the detriment of people who have bought and financed real estate. These new rules may also affect the market value, rent and options for renting out a home.