15 Sep Buy-to-Let Mortgages – what you need to know
If you are planning to invest in a property to let you will need a buy-to-let mortgage. Over the last couple of years there have been many changes in the market! So what kind of mortgage do you need to be thinking about?
Guide to buy to let mortgages.
Low rates on savings accounts and an unpredictable stock market have made buy-to-let property investment more and more attractive. Landlords in many parts of the UK have also found that there is high demand for rental properties as first time buyers struggle to save for deposits.
Mortgages for landlords
If you are thinking of investing in a property to let, your mortgage will be one of the most important factors. You will not be able to take out a residential loan, but many banks and building societies offer buy-to-let mortgages, specifically designed for landlords.
Bigger deposit for buy-to-let
A buy-to-let mortgage is similar in many ways to a standard home loan. However, there are some important differences to take note of before you dive in.
Buy-to-let mortgage rates vary, just like any other mortgage; they are also dependent upon the size of deposit available and the risk to the lender. You will often be required to place a bigger deposit on a buy-to-let property – this is usually a minimum of 25%.
Banks and building societies carefully assess your personal income when calculating how much you can borrow on a residential mortgage. With a buy-to-let loan, they forecast expected rental income – and most lenders insist that the annual rental income is at least equal to 125-145% of the annual mortgage interest payments. Plus they also stress test the interest rate at around 5% which pushes the acceptable rental figure higher.
Strict conditions like this are put in place to cater for the increase in risk of buy-to-let mortgages. Statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage.
The required income buffer on top of the mortgage interest due is in place to allow for periods of vacancy as tenants move between rental properties.
Do you qualify for a buy-to-let mortgage?
Most banks and building societies insist on a substantial eligibility criteria. This often includes a minimum age and if you have an income. You will usually be limited to the amount of buy-to-let loans and there will be a cap on the total amount you can borrow.
Choice of mortgage deals
As with residential mortgages you can choose from a number of formats, including fixed rate and trackers. You will also need to pay for the mortgage product itself – they’re usually slightly higher than residential mortgages. If you want stability of a set price every month, you need a fixed-rate; however, tracker loans are usually cheaper, but you will need to be financially flexible enough to deal with fluctuations mortgage rates.
You can also look at interest-only mortgages – these are popular among landlords as you only pay the interest each month – clearing the capital debt when you sell the property. With a loan like this the monthly payments are cheaper than a repayment mortgage; also, you can offset a percentage of the mortgage interest against your tax bill, however there is new legislation in place that affects this strategy.
Find the best buy-to-let mortgage deal
There are risks in any investment. Make sure that your finances are robust and should the worst happen you can still cover the mortgage payments. Remember your home may be repossessed if you do not keep up your repayments.
If you want free impartial advice and you want to find the best mortgage deals on the market make sure you drop us a line on 01753 439000 or email us and a member of the team will be happy to help. You can also keep on top of the latest news from Nazcot Financial and the mortgage industry by following us on Facebook, Twitter and LinkedIn.
photo credit: Faiz Zaki