Buy to Let Mortgages
If you’re buying a property to rent out, you must get a buy-to-let mortgage.
Buy-to-let property has become a more attractive investment option due to low savings rates and somewhat volatile stock market fluctuations. Furthermore, the increasing demand for rental properties in certain parts of the UK has made being a landlord an appealing source of growing income.
If you’re buying a property to let, the first hurdle is to make sure you get the right type of mortgage. Get it wrong, and you’ll be committing fraud.
What is a buy-to-let mortgage?
A buy-to-let mortgage allows you to borrow money to purchase a property that you can then rent out. Buy-to-let mortgages are offered by a number of banks and buildings societies, and are traditionally more expensive than a standard residential mortgage because they are considered a higher risk.
If you have a residential mortgage and you rent out your property without the bank’s knowledge, you could find yourself committing mortgage fraud.
Bigger deposit for buy-to-let
If you want to take out a buy-to-let mortgage, you’ll need a higher deposit than you’d need for a residential mortgage. You can expect to put down at least 25% as a deposit, although many of the best buy-to-let mortgage deals require a 40% deposit.
Buy-to-let mortgage rates
Buy-to-let mortgage rates vary, and similarly to any other type of mortgage, are dependent on a number of factors including how risky the loan is, how much deposit is put down and how strong your credit score is.
The rates of buy-to-let mortgages are often higher than residential mortgages. Banks and building societies charge higher rates for buy-to-let properties because they present a greater risk to the lender.
Buy-to-let mortgages are only issued when a bank or building society thinks they are affordable. This is judged by an affordability calculator that weights up your personal income and the expected rental income against the value of the property. Most lenders will insist that the annual rental income must equal at least 125% of the annual mortgage repayments.
So, if you are repaying £15,000 a year, your rental income should be at least £18,750. If your mortgage repayments were £20,000, you’d be looking for rental income of £25,000 or more.
The strict conditions reflect the greater risk of buy-to-let loans, as statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage. The required rental income buffer on top of the mortgage interest due is also there to allow for a period of vacancy between tenants.
Most buy-to-let loans are interest only, not repayment. In other words, you pay only the interest each month and clear the capital debt when the property is sold. There are several advantages to an interest-only loan if you are buying a property to let.
Interest-only monthly payments are cheaper than a repayment mortgage – £360 on average, less than half of what you’d pay for a first-time buyer’s residential mortgage of £770 each month. That’s according to MoneySuperMarket data for the 2016/17 financial year.
Secondly, you can usually offset a percentage of the mortgage interest against your tax bill.
Of course, the downside is that these repayments don’t pay off any of the capital. This can be especially tricky if house prices are flat or falling, as it increases the risk of selling the property and not having enough capital to repay the mortgage.
Make sure you can afford it
There are many risks involved with buy-to-let investments, therefore you have to be confident that you can cope if your property is empty for any period, or if tenants prove to be unreliable.
You also have to make sure the sums add up, bearing in mind that both rents and house prices could come down, leaving you with a large interest payment to make each month.