Author : Homeloans SA
Buy to Let – What are the Banks Requirements
Investors who are looking for a good return on their investments still believe that property is the place to put your money. One way of doing so is to through a process called “Buy-to-Let.”
What is Buy-to-Let?
The name is actually very descriptive – you buy a property as an investment, not to occupy yourself but clearly with the intention of renting it out. If you do not have sufficient money available to fund the transaction you can obtain a home loan from any of a number of banks or other mortgage financiers. Almost all the banks have developed a specific home loan product for the purpose of buy-to-let transactions.
Is this a good time to invest in buy-to-let property?
There are a number of reasons why we feel that now is an excellent time to enter this market:
1. The stringent lending requirements brought about by the National Credit Act and current economic conditions have made it difficult for many to qualify for a home loan. The demand for good rental properties should remain high for a long time.
2. Investors can find real bargains at the moment – many people are desperate to sell their properties during the recession and the banks have an increased number of properties in possession.
3. The interest rate is in a downward spiral making it easier to buy for investment.
The process of borrowing money to invest in buy to let property
When one needs to borrow money for the purpose of investing the funds in an income-generating asset it is referred to as gearing. Gearing is expressed as a ratio. If you are buying a property for R1 000 000 and you only require a loan for R500 000 your gearing will be 50%.
Under the current economic conditions no bank is offering 100% loans and the requirements for buy-to-let are even stricter. You will therefore need a deposit as well as meeting the other qualifying criteria.
What are the qualifying criteria for obtaining a buy-to-let home loan?
The banks do not have uniform products so this is merely a guideline. You can get specific details directly from the bank of your choice, or even better, shop around and compare what is available in the market.
1. The amount you will qualify for will depend on your personal credit profile. Similar to applying for any other loan the bank will look at your credit record, your ability to pay back the loan, your overall indebtedness, job stability and other personal circumstances. Joint income may be used to establish the maximum amount of finance. There will be a minimum joint gross income to qualify for this type of loan, probably in the vicinity of R30 000 per month.
2. You can include a percentage of the potential rental income you expect as part of your income – usually not the full amount. The percentage the bank will take into account will differ from bank to bank. It is also looked at in relation to the size of the deposit or the gearing. As an example – one bank will allow 40% of the rental income to be included if you have a 10% deposit to put down. Another bank is prepared to consider 100% of the rental income, so there are big differences between banks.
3. When you apply for the loan you will need a copy of the offer to purchase, proof of income, three months’ bank statements, proof of residential address and your identity document. If you plan to buy the property jointly or in the name of a company or trust all the relevant documents will be required.
Don’t forget about the other costs
Paying back the buy-to-let home loan will not be your only monthly expense. You should not forget to calculate other expenses in your monthly budget, such as: insurance, municipal services, maintenance costs, advertising for tenants and managing agent’s fees (if you choose to make use of the services of a managing agent.) You will also need to pay the transfer – and attorney fees as well as the mortgage registration fee.
Some advice if you are considering investing in the buy-to-let market
1. As with any property you need to consider this as a long-term investment – with property location is everything. You simply must buy in a good area.
2. This should not be a hasty decision – do your homework and research as much information as you can lay your hands on, talk to experts.
3. If you are buying an old or run-down property be careful, you may have to spend much more on it than you had anticipated. Get proper quotes.
4. Check what rentals are being paid in the area you are looking at.
5. Finding the right tenant and managing the property require some specialized knowledge as well. You need to know the requirements of the law as you are now going to be a landlord. If you do not have the time you could consider using a managing agent.
6. Rather be conservative when doing your financial calculations. Bear in mind that you may not always have a tenant in the property 100% of the time. Consider if you will be able to carry the loan repayments yourself for a month or two.
Lending requirements in South Africa have become very stringent –your financial affairs will need to be in order for you to qualify for this type of finance.