Buying a property to rent out can be a good way to earn extra income. But what if you have a poor credit history? Can you still invest in a rental property, and will you be able to get a buy to let (BTL) mortgage with bad credit?
We’ve taken a look at what you should consider before taking the plunge, and how a specialist mortgage broker may be able to help.
When you rent out a property your tenants will be paying your mortgage for you, as well as generating some additional income. Your buy to let property is an asset, and at a time when property prices tend to rise while savings interest rates are low, it can seem like a particularly attractive asset.
Having a poor credit history shouldn’t necessarily prevent you from investing in a buy to let property, and it could provide you with an effective way to boost your income and help you as you continue to get your financial life back on track.
If you haven’t invested in property in the past there are a few things to think about.
You should thoroughly research the market to ensure that it is a suitable option for you. For example, when you invest in a buy to let property you are generally tying up your money up for some time. If you’re likely to need access to your cash at short notice, then buy to let may not be for you.
You also need to be realistic, particularly if you’re thinking of renovating and/or managing the property yourself. Do you have the time and skills that you’ll need to do this? If not do you have the funds to pay someone else to do this for you?
If you do decide to go ahead with your investment you really need to do your homework regarding where you choose to buy. Remember you’re not looking for a property for you to live in. You need to make sure that the property is somewhere that lots of other people would like to live. Is it in a commuter belt? Are there good transport links? Is it an area that’s attractive to students?
While property prices have historically risen there can of course be no guarantee of this. If you need to access funds in a hurry you may find yourself trying to sell your property during a downturn inprices, which of course would lose you money. Even if prices have risen, selling a property with sitting tenants may create some problems for you.
There is also the risk of your property lying empty. If you have no tenants and no rent coming in, you may not be able to cover your buy to let mortgage repayments. This could also be the case if you fail to command the expected level of rent. Missed mortgage repayments will impact on your credit record, something you will want to avoid, particularly if you have only just started to repair your credit file.
Acting as a landlord is a responsibility and you need to be sure you understand what these are. You’ll have a duty to keep your property up to an acceptable standard, and you will also have the responsibility of finding tenants, ensuring their suitable and making sure any complaints or queries they have are addressed. Of course, you could employ a property management to carry out some or all of these duties, but you’ll the need to factor this cost into any calculation of the profits you could make.
If you’ve had adverse credit in the past, because for example of loan defaults, bankruptcy or CCJs, that doesn’t mean that you won’t be able to find a buy to let mortgage lender who is prepared to provide you with a deal.
Buy to let mortgages are similar to ordinary residential mortgages although there are a few differences.
The majority of buy to let mortgages are interest only. This means that you only pay the interest on the loan, making your monthly repayments lower. However, this does mean that you’ll need to have a plan to repay the loan amount at the end of the mortgage term. You might for example decide to put some of your rental income into an investment plan to cover this cost. You should speak to a financial advisor before making any decision.
Buy to let mortgages generally require that you have a substantial deposit ready to invest – at least 20-25% of the property value. If you are lucky enough to a higher deposit you may find it easier to find a suitable buy to let lender
Buy to let mortgage lenders assess your ability to repay the mortgage in much the same way as for standard residential mortgages. That is, they will look at your income, your outgoings and your credit file. While this can sound like a barrier to someone with a poor credit history, your credit history only forms part of the criteria for prospective buy to let mortgage lenders.
Lenders also take into account the potential rental income of the buy to let property you are interested in buying. They would expect rental income to amount to at least 125% of your mortgage repayments. So, for example if your monthly mortgage repayments are £400 you should be able to charge at least £500 rent on your property.
It’s worth noting that for the vast majority of buy to let mortgages you won’t be allowed to rent to a close family member; for example, buying a property to let to a child wouldn’t be permitted.
When you arrange your mortgage through a specialist bad credit mortgage broker such as Simply Adverse you get the benefit of their experience in helping people like you secure bad credit buy to let mortgages.
As we’ve demonstrated, buy to let mortgage lenders don’t only look at your credit history, but even when they are considering your poor credit history for a buy to let mortgage, different lenders view this in different ways.
As we work with theses lenders regularly, we understand what they will be looking for. We’ll be able to look at the full picture of your financial circumstances and find the lenders that are most appropriate for individual circumstances.
If you’re considering purchasing a buy to let property but are concerned that your poor credit record may hold you, why not contact Simply Adverse, and find out how we could help.
Read about our Buy to Let Mortgage with Bad Credit service and get free independent help from our bad credit expert brokers