Buy-to-Let Mortgages - What You Need to Know
A rental property can be an excellent investment opportunity and one you don’t want to miss out on, but if you don’t understand how a buy-to-let agreement works rest assured you are not alone. Buy-to-let mortgages can appear confusing and complicated, but once you understand the basics, you’ll be ready to seize the moment, buy a property, and turn savings into profits.
As an authorised mortgage broker, we are happy to help if you’re unsure which provider to choose to help fund your investment, or just need some unbiased advice.
Here’s everything you need to know about a buy-to-let mortgage before you sign on the dotted line.
How Do BTL Mortgages Work?
Buy-to-let mortgages aren’t much different to the loans made on residential properties but there are a few subtle differences and some additional related costs too;
- The deposit required when purchasing a buy-to-let property is often higher, typically 25% of the property’s value. Bear in mind that the higher the deposit sum you can contribute, the lower the interest rate on your mortgage is likely to be.
- Many buy to let landlords prefer to use interest-only mortgages so that the capital borrowed is not repaid until the end of the mortgage term. Don’t forget that you will need to have the resources available to pay back the original loan at the end of the loan.
- Because a buy-to-let property is a business proposition your aim is to make money not live in the property yourself. To pay back the mortgage you need a steady flow of tenants to pay the rent and help you meet the monthly repayments. Bear in mind you are not allowed to live in a property yourself if you have a buy-to-let mortgage on it.
- The mortgage rate will be higher on a BTL mortgage.
- Remember that the stamp duty payable on a buy-to-let property will be higher than on a residential one.
- You will need specialist Landlord Insurance on your BTL property. Regular Home Insurance products will not apply.
Who can Get a BTL Mortgage?
Most people can obtain a BTL mortgage, but you need to fulfill certain criteria. As with a residential mortgage, your lender will want to carefully assess the risk in lending you money, so they will take your credit history into account. They will also review your income and would be unlikely to offer you a buy-to-let mortgage if your annual earnings are below £25,000.
Only homeowners can apply, which means you should own your house outright or have an existing mortgage. There is also normally an age limit, with banks generally wanting borrowers to be under the age of 70 when the mortgage ends, although some lenders have an upper age limit of 75.
If you require any help or clarification of these points our dedicated brokers are happy to help.
How Much Can You Borrow on a BTL Mortgage?
The amount you can borrow will depend on the amount of rental income you can achieve which in turn will be influenced by the property itself and the local rental market. In normal circumstances, lenders will want your rental income to be 25-30% higher than your mortgage payments, so the more you can charge in rent the more you will be able to borrow.
To find out about the rental market in your chosen area check local press and websites and windows of letting and estate agents. You may also find an online buy-to-let mortgage calculator useful.
What types of Buy-to-Let mortgages are available?
There are several different types of Buy-to-Let mortgage available including:
Fixed-Rate Mortgage – this means your monthly repayment is fixed for an agreed period of time, helping you to budget accordingly.
Tracker Mortgage – this type of mortgage has a rate of interest that is set at a percentage above the Bank of England’s variable rate and will fluctuate accordingly.
Discount Variable Rate – a set discount is applied to the lender’s variable rate, so the rate payable amount fluctuates but the discount percentage is set in stone.
Where Can You Get a BTL Mortgage from?
How Do They Do That?
Mortgage brokers use their extensive experience and expertise to advise on all aspects of your buy-to-let investment strategy. For example, what are your plans for the times when you are without a tenant and have no rental income? What about maintenance bills? Repaying Mortgages – when your interest-only mortgage comes to an end how are you going to repay the capital?
Mortgage brokers understand all of the pros and cons of the rental market and can even help save you money on tax. For example, Capital Gains Tax is charged at 18%, or 28% on profits of over £11,700 on properties that are rented out, however, if you own a property with a partner the allowance increases to £23,400.
Remember too that the process of buying a rental property can be a very stressful one and a good mortgage broker can help by guiding you through the process and providing updates.
Buy to Let Advantages
- Long-term profits – the market is unpredictable, but the trend is towards the UK housing sector rising in value. In the last two decades, the market has skyrocketed by 263%, meaning the odds of making money are high.
- Lots of rental applications – as the market for first-time buyers gets more expensive, people turn to rentals for help so there is the prospect of a steady flow of tenants to keep the property occupied.
- Tax – certain expenses are tax-deductible and can be offset against your tax bill.
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