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Buy to Let Mortgages – What you need to know
You might be looking to buy a property to let out to tenants. Alternatively, you could already own a home that you’re thinking of letting. Both cases would mean you are likely to need a Buy to Let mortgage. This type of mortgage is slightly different from the standard residential kind.
How do Buy to Let (BTL) Mortgages work?
If you’re letting a residential property that you don’t own outright, you must have a Buy to Let mortgage. Letting under a standard mortgage is considered to be fraud.
To buy a property to let, you will usually need a larger deposit than for a residential mortgage, somewhere between 20 and 40%. Interest rates are usually higher, too.
You can choose a repayment mortgage, but interest only deals are more popular. With interest only, monthly payments don’t reduce the overall total of the loan – just the interest. When your mortgage ends, you’ll need to repay the total borrowed.
People choose interest only because it means they make more monthly profit from their property. Interest only payments are lower than repayments, so you’ll get a higher income as a landlord.
Who can get a Buy to Let Mortgage?
To get a Buy to Let mortgage you usually need to meet the following criteria:
- You own your own home
- You have a good credit record
- You earn £25,000+ a year
- You’re under 70, as most mortgages last 25 years
How much can you borrow on Buy to Let Mortgages?
Your tenants will essentially pay your mortgage for you via their monthly rent. So mortgage lenders will want proof that you can generate enough rent to keep up the payments.
They will expect a monthly rent of at least 125% of the mortgage payment – sometimes up to 145%. It’s therefore very important to do your research on how much rent the property can generate. Important factors are property size, facilities, quality and residential area.
The more your potential monthly rent, the more a lender will offer you. If you can afford a good deposit you may be offered a higher total. Using a mortgage calculator is a good way to get a sense of the sums involved.
How do I find a good deal on a Buy to Let Mortgage?
It’s always important to shop around for financial products. But there are some important considerations. Would you feel more comfortable with a fixed rate mortgage, for easy planning, or opt for a variable rate, which tends to be cheaper?
The simplest and most thorough approach is to seek expert help. A mortgage broker will be able to rapidly source suitable mortgage deals and present them clearly – taking fees, costs ( including stamp duty) and potential rental income into account. They can also advise you on home insurance, landlord insurance and other protection products.
If you have four rental properties or more, you’re considered a portfolio landlord – and you are better off speaking to a specialist mortgage broker for advice, such as Blue Pepper Mortgages.
What are the risks of Buy to Let?
There are two major risks in buying a property to rent. The first is that there is no tenant in the property for weeks or months. The rental market could go quiet, for example, or a problem with the house means it cannot be let.
In these scenarios you’ll have to cover the mortgage payments yourself. You can either make sure you have a contingency fund for this kind of issue or get an insurance policy to cover you.
Ensure you can pay back the loan
The other big risk is choosing an interest only mortgage and not having a repayment plan. Many landlords simply hope that at the end of the mortgage term they can sell the property to pay back the loan.
The challenge is that house prices can go down as well as up. If the house is worth less than the mortgage value, you will have to pay the difference. It can also take months to sell a property, so make sure you get the timing right.
It’s safer to invest some of the profits from your rental property or make some mortgage payments to reduce the debt, to protect against future issues.
Bear in mind too that the profits from selling your buy to let property are subject to Capital Gains Tax.
To discuss your rental property plans and aspirations, contact us today. We’re fully registered in England and have the right accreditations and experience to provide expert advice.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
The Financial Conduct Authority does not regulate most Buy to Let Mortgages