Buy To Let Mortgages

Buy-to-Let Mortgages Explained

If you have been searching for investment opportunities in the property market, you have likely come across the saying “buy-to-let mortgages” on more than one occasion. However, what does it mean?

This guide will explain everything you need to know.

What is a buy-to-let mortgage?

If someone wants to purchase a property as an investment rather than it being a place to live, a buy-to-let mortgage can make a lot of sense. It is a great solution for those that want to add to their property portfolio but don’t necessarily have the required funds to purchase the house or flat outright.

With that said, wouldn’t it make more sense to opt for a standard residential mortgage? Well, if you’re buying a property to let, most lenders are against providing you with a residential mortgage for this purpose. This is where the buy-to-let alternative swoops in to save the day.

As you would expect, some compromises have to be made with a buy-to-let mortgage. When compared to residential mortgages, the required deposit and interest rates are both typically higher. Furthermore, the Financial Conduct Authority doesn’t usually regulate buy-to-let mortgages that are bought as an investment.

Who is a suitable candidate for a buy-to-let mortgage?

Do you want to make the leap into the rental property market? Perhaps you’re an experienced investor and spotted a large opportunity that requires an equally large cash deposit? If you find yourself in a situation like those two examples, a buy-to-let mortgage can set free your property investment potential.

For example, say you are eyeing up a property in London. Now the capital is notorious for sky-high house prices. This means an investing newbie is unlikely to drop the required amount to snap up a property outright. Yet with buy-to-let mortgages, London suddenly becomes a more accessible option for property investors.

Just keep in mind: buy-to-let mortgage functions in a different way to a residential mortgage. As a result, it’s important to check that you can afford this mortgage type and if you are even eligible.

Buy-to-let mortgages: how do they work?

Even if you go with a buy-to-let mortgage, the door is still open for two repayment options: capital repayment or interest-only. The latter, however, tends to be the mortgage type for investors. For those not sure about what an interest-only mortgage entails, this is when you pay off just the loan’s interest – and not the borrowed balance – each month.

Landlords often go with an interest-only mortgage for one big reason: monthly payments are reduced significantly. This means they can maximise their rental earnings from tenants, They then use the rent they gain to pay off the monthly interest, and the rest of the money – minus any additional expenses – can be seen as profit. However, for any landlord who decides to go this route, they have to remember how much they owe on their mortgage if they decide to sell the property down the line.

How much money can be borrowed with a buy-to-let mortgage?

As you would expect, the amount of money you can borrow is dependent on your own personal circumstances.

First of all, you have to pay close attention to the deposit you need to make. Unlike with a standard mortgage, you will have to put down a significantly larger deposit. This deposit amount usually sits between the 25% and 40% mark. So, if you spot a buy to let Croydon opportunity for £300,000, for example, you may have to end up splashing out £120,000 for a deposit – no small change even for experienced, long-term investors.

Aside from the deposit, you also have to consider the terms set by your lender. They will want to know about the type of rental income you expect to earn from a planned property. Of course, they’re not going to hand you a mortgage if your expected tenant income is too low – they need to know their investment is safe. As long as the income is 20-30% above your set mortgage repayment, this should be deemed acceptable by your chosen lender.

Before contacting a lender with a mortgage request, it makes sense to do your research. See what type of rates other properties in the neighbourhood managed to acquire. You can then use this knowledge to determine if you can borrow enough to purchase your property of choice.

What interest rates are attached to a buy-to-let mortgage?

As mentioned already, interest rates are generally higher for a buy-to-let mortgage than its residential mortgage counterpart.

This is due to lenders requiring that extra layer of security. After all, there’s no guarantee you will have a tenant within the property at all times paying rent. Plus, a tenant could also struggle to keep up with their monthly payments. If you’re failing to receive the income you expected, this might lead to you deferring on your mortgage payments.

It’s also important to note there are different buy-to-let mortgage options available. These options include:

·       Fixed-rate mortgage

·       Tracker mortgage

·       Discount variable mortgage

The mortgage type you pick can affect the interest rate you’re paying. In addition to this, other factors like how much you anticipate you’ll earn from rent and the total amount you’re borrowing will cause the interest rate to go up or down.

What criteria do you need to meet for a buy-to-let mortgage?

Having the right amount of money for a deposit is mandatory. That’s a given. As mentioned above, you also have to show that renting the property to tenants is a viable path to take.

Yet, there are other points you have to cover when making your buy-to-let mortgage application. For a start, you typically need to own your current home outright – or at least have a mortgage for it. A strong credit rating and limited existing debt will also work in your favour.

Oh, and there tends to be an upper age limit set by lenders. Usually, you cannot be older than 75 when your agreed mortgage terms come to an end.

Get in touch with Paul O'Shea Homes to find out more about our buy-to let services.