Understanding Buy to Let Mortgages
If you’re looking to buy a property with a view to renting it out to tenants, you’ll need a buy to let mortgage.
What Is A Buy To Let Mortgage?
Simply put, it’s a form of mortgage that a bank or lender offers to prospective landlords for a rental property. It’s different from a regular mortgage as it is explicitly sold to people looking to rent out a property. In the UK, you won’t be able to find finance for an investment property without a buy to let mortgage or other lending specific for that purpose.
What Are The Differences Between A Buy To Let And A Standard Mortgage?
There are a few main points to keep in mind, so it’s essential to do your research before you sign on the dotted line.
A buy to let mortgage is a legal requirement for a house that is going to be rented out and they often require a bigger deposit to meet the lender’s security criteria. Plus, there’s often a higher rate of interest or higher fees from the lender, and you must pay stamp duty on all properties in your investment portfolio. As a result, the mortgage is often more expensive than a traditional one for a residential property.
Why Are The Rates Higher?
It’s because of the unpredictability of being a landlord. Although you expect the monthly payments to cover the debt, there might be complications with tenants. Therefore, your lender asks for extra protection in case of difficulties. It’s all about potential risk.
How Can You Pay Off The Debt?
Assuming you choose a capital repayment mortgage, you’ll make monthly repayments to repay both the amount borrowed and the interest. If you’re on an interest-only mortgage, you’ll only be paying the far smaller amount of interest on a monthly basis, with the full amount of the loan due at the end of the mortgage term. This can be repaid by selling the property.
How Big Is The Deposit?
Generally, the minimum deposit is 25% of the value of the property. However, in some cases, lenders might ask for 40%.
Types of Buy To Let Mortgages
There are two main types of buy to let (BTL) mortgage:
This is where the rate is linked to the base rate of the Bank of England. The lender adds on an additional rate that stays static on top of the base rate. If the base rate increases or decreases so does your mortgage payment by the same percentage.
A fixed-rate mortgage is where you pay a fixed rate for the duration of the mortgage deal, usually 2-10 years. Your payments stay the same over this period.
Why Get A Buy To Let Mortgage?
If you’re looking to invest in a rental property, a buy to let mortgage is a must unless you buy a property outright. If you have positive equity, you will make money even if you have to sell to clear the debt. Also, a big deposit coupled with the fact that you only pay interest means the monthly payments tend to be lower than a traditional loan making it easier if the property is empty at any time.
As long as you have a good credit rating, you should be eligible. Get in touch now to find the right mortgage deal for you.
Some types of buy to let mortgages are not regulated by the FCA.