Many of our customers want to be able to let their owner-occupied home. For example when they have bought a new home, and they want to keep the home they lived in before. But it may also be a home purchased specifically for letting. Normal residential mortgages stipulate that the home must be occupied by the owner; letting is not permitted. But there are now several providers offering buy-to-let mortgages (also referred to as investment mortgages). Buy-to-let mortgages are specifically for homes that are let or intended to be let, and you are not allowed to occupy it yourself.

In this article we set out some of the issues that are important in buy-to-let mortgages.

Please note: we are currently only offering support for buy-to-let mortgages to existing customers.

Buy-to-let mortgage

Equity

If your current home is worth more than the mortgage or it is mortgage free, there are a number of mortgage providers who will allow you to raise your mortgage up to the current market value of the home. You can use this amount to purchase a new home you intend to let, possibly in combination with a buy-to-let mortgage. Interest on a residential mortgage is usually lower than on a buy-to-let mortgage.

Commercial vs. consumer

There is a big difference between investing in property commercially as a professional and as a consumer. For example, consumer investment is regulated by the AFM, professional investment is not. For consumers, there is the same income assessment as for a normal mortgage (under certain conditions the future rent can be added to your income), while in commercial investment the rental stream is the main factor.

There are mortgage providers that only service the professional market, while others are only for consumers, or service both markets (the articles on the pages of the lenders are all in Dutch).

Consumers:
NIBC, Lloyds, RNHB, ING, Woonfonds, NN, Handelsbanken, Rabobank, Dynamic Credit, etc.

Commercial:
NIBC, Domivest, RNHB, ING, Handelsbanken, DCMF, Fiduciam, Mogelijk, etc.

When do you qualify as a business or a professional?

There are no hard and fast rules for this. For most lenders you qualify as a business if you own 5 properties or more, or you present a plan for owning 5 properties in the next few years (with financial details showing that you have the means to fund this). If you already own property and the rental stream is €35,000 or higher and/or comprises more than 30% of your total income, this may also be a reason to qualify you as a professional.

When do you qualify as a business or a professional?

There are no hard and fast rules for this. For most lenders you qualify as a business if you own 5 properties or more, or you present a plan for owning 5 properties in the next few years (with financial details showing that you have the means to fund this). If you already own property and the rental stream is €35,000 or higher and/or comprises more than 30% of your total income, this may also be a reason to qualify you as a professional.

Market value and valuation

Just as with a normal mortgage, you will need a valuation report in order to determine the market value; in this case it would be the let market value. This let market value is often between 70% and 100% of the purchase price. The valuer determines this value and will mainly consider how quickly and at what rent homes are let in a certain area.

All mortgage providers have their own requirements as to who is allowed to perform valuations. So you should first discuss your mortgage provider with us before choosing a valuer! Valuation costs for a commercial buy-to-let mortgage are generally higher than for a consumer buy-to-let mortgage.

Contributing your own capital

Most mortgage providers will only allow you to borrow up to 70% to 80% of the let market value. If the appraisal is low, let’s say 70% of the purchase price, you can borrow about 80% of 70%, that is to say 56% of the purchase price. That means that you have to bring in 44% plus the transfer tax (usually 2%), advisory costs, the costs of the civil-law notary, of the appraisal, the estate agent’s fee, etc.

Maximum borrowing

In addition to the value of the home, your income and the rental stream are factors in how much you can borrow. To get a rough idea of how much you can borrow in a buy-to-let consumer mortgage, use the tools of e.g. Woonfonds or Dynamic Credit.

The calculation of a commercial buy-to-let mortgage is mostly based on the rental stream in proportion to interest and repayments. This ‘debt service coverage ratio’ (DSCR) should be at least 1.25 to 1.5. Although income is not part of this calculation, most lenders do require the presence of an average income. If (temporarily) no rent is being paid, this income provides an alternative flow of funds to cover the mortgage payments.

Type of repayment

Almost all providers allow you to borrow 50% of the market value interest-only. The remainder must be repaid. In most cases this can be done either in level payments or straight-line. If you intend to finance multiple homes in the future, it makes sense to keep your monthly repayments as low as possible, because they will be taken into account in the assessment for your next mortgage. The best way to do this is to opt for an interest-only mortgage. In most cases you can repay 10% of the principal without penalty interest, even when you opt for an interest-only mortgage. Your Viisi adviser can discuss these conditions with you.

Tax

Most people buy a home as Box-3 for tax purposes. The value of the property is then added to your asset base and the Box-3 mortgage can be deducted. This means that you won’t pay tax on the rental income. Discuss with your tax lawyer whether Box-3 is the best option in your case.

Risks of buy-to-let mortgages

Below we describe some of the risks involved. This list is not exhaustive.

Interest rate goes up

After the fixed-rate period the lender will make you a new interest proposal. At that time, interest rates may be (significantly) higher. As a result, the rent may no longer be sufficient to cover the monthly repayments. If you do not have enough income to make up the difference, you may be forced to sell the security (the home).

Value decrease

The value of the property may go down as well as up. It is possible that at the time of sale the value of the property has fallen below the level of the mortgage. In that case, there is a residual debt.

Political uncertainty

As a result of the shortage of residential property, there is political pressure to adjust regulations. This may impact the possibilities for letting and the rent price.

Lower rent or no rent

This may happen if you can’t find a tenant or you can only let the property at a lower rent. Another scenario could be that the tenant does not pay the (full) rent.

Building insurance

Make sure that the property is properly insured. And check that the insurer permits letting the home. If the home is insured through the owners’ association, check that the policy provides enough cover and that the owners’ association allows letting.