Buy To Let Mortgages

Buy To Let Mortgages

Investing in a property as a landlord is a huge undertaking, which is why you want to make sure you have our support throughout the process.

A buy to let mortgage is a huge commitment, so below we have created a short guide to cover costs, your responsibilities and the potential risks of becoming a landlord. This outline will help you decide whether a buy to let mortgage is the right choice for you.

What are buy to let mortgages?

These are mortgages that are sold specifically for buying a property for investment, instead of a place to live. If you intend to rent out a property, you cannot finance your purchase with a standard mortgage.

What is the difference?

Buy-to-let mortgages are usually interest-only. This means that monthly payments will only ever cover the interest on the mortgage.

The money you’ve borrowed – what is known as capital debt – will not decrease. This means at the end of the term, the amount would need to be paid off, which can be done by selling the property, or taking out another mortgage if you keep the property.

For a buy-to-let mortgage, you would need a larger deposit, the fees are larger, and you would pay a higher interest rate. There is also additional stamp duty if the property is not your main home.

Why are they more expensive?

The reason why they are more expensive is because there is an increased risk for the lender. If you are a landlord, then you would expect your monthly mortgage payments to be covered by the rent you receive. The risk is there maybe a month or months where your tenants can’t afford the rent, or you have no current tenants.

What deposit do you need?

Lenders usually need a larger deposit for a buy-to-let mortgage, usually, this would be around 25% of the value, but some mortgages may need a deposit of 40%

The deposit is larger, so it protects the lender in case you default on a payment due to any late rent payments.

The benefit of paying a larger deposit means that your monthly costs are lower, and this will also reduce the amount you have to pay off at the end of the mortgage.

What are the interest rates?

This will depend on the amount you borrow, your current financial circumstances, how much rent you would expect to receive and the mortgage type.

The different types of mortgage

  1. Tracker mortgages – The lender sets the interest rate at a certain percentage above the base rate from the Bank of England. This means your mortgage could change month to month based on the base rate.
  2. Discounted variable mortgage – These are fixed at a set percentage below the lender’s standard variable rate. Discounted rates usually last two years.
  3. Fixed-rate mortgage – A fixed-rate can keep your monthly repayments at a low rate from two to ten years.

What happens at the end?

On a buy-to-let, you only pay the interest, when the term comes to an end, you will need to repay the full mortgage. You can either extend the mortgage or sell the property.

If you sell, you’ll potentially make a profit if house prices have risen since you took out the mortgage. If house prices have fallen, then you will need to pay the rest off.

Can I get a buy-to-let mortgage?

As they are a riskier proposition for a lender, the requirements are stricter. It’s usually required that your yearly income is £25,000 or more and your existing debts and credit record will be checked.

What are the fees?

You would need to pay tax on any income from rent, ensure you have and pay for landlord’s insurance and rental insurance, and if you use a letting agent, you would need to pay their fees.

The best thing to do is to investigate landlord regulations and responsibilities that are involved when buying to let.

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