Buy-to-Let Mortgage – What, Why, How, Pros & Cons
Are you considering buying an investment property? If your answer is ‘yes’, you will need to look into buy-to-let mortgages. Find out what they are, how they work, and how you can get one. Weigh in the pros and cons to make your investment affordable and use our guide to navigate the complex rules surrounding buy-to-let mortgages.
WHAT IS A BUY-TO-LET MORTGAGE?
Buy-to-let mortgages (also known as BTL) are special mortgages for those looking to purchase a property not as a home, but as an investment. They apply to people buying a property and then renting it out.
While still similar to regular mortgages, buy-to-let mortgages are financing solutions offered by lenders specifically for this type of property purchase.
WHO CAN APPLY FOR A BUY-TO-LET MORTGAGE?
Buy-to-let mortgages are designed for first-time landlords and investors with large portfolios alike. Their costs are somewhat higher than those of standard mortgages and the deposits required by lenders are over 20%.
HOW DOES A BUY-TO-LET MORTGAGE WORK?
There are many similarities between buy-to-let mortgages and regular mortgages. However, there are also key differences between them.
First of all, to apply for a buy-to-let mortgage, you will need to fulfil all or most of the criteria below. Second, you should know that buy-to-let mortgage fees and interest rates are higher. Once you understand the risks and costs, you should also take into account some other factors.
For instance, the deposits lenders require for buy-to-let mortgages vary between 25% and 40% of the value of the property. Your income will need to be high enough to allow you to cover this cost.
On the other hand, buy-to-let mortgages are mostly interest-only. This means that you pay interest each month for the term of the loan and repay the original loan in full at the end of the loan period.
You can use the rent you collect each month to cover the interest payments. You can also choose repayment mortgages if you prefer paying interest and part of the original loan each month.
BUY-TO-LET MORTGAGE CRITERIA?
The criteria you will need to fulfil to access a buy-to-let mortgage are:
- You are looking to invest in a residential property
- You already own a home (paid for or under a standard mortgage)
- Your credit record is good
- Your yearly income is above £25,000
- You have a deposit of at least 25% of the value of the property
- You won’t be over 70 years of age by the time the mortgage period ends.
ARE BUY-TO-LET MORTGAGES INTEREST-ONLY?
No. Many borrowers preferred to take out interest-only mortgages until now. However, the repayment mortgage alternative is making a comeback and more investors are choosing it instead.
HOW MUCH MONEY CAN YOU BORROW ON A BUY-TO-LET MORTGAGE?
The amount you can borrow from a lender based on a buy-to-let mortgage depends on your financial circumstances. Your yearly income and credit record and the amount of initial deposit you can spare will all make a difference.
How much rental income the property can generate will also be considered. Lenders do not grant mortgages to properties that cannot generate a monthly rent that is higher than the monthly mortgage repayment.
The larger your initial deposit is, the better deal you can expect to get from a lender.
HOW EXPENSIVE ARE BUY-TO-LET MORTGAGES?
Because buy-to-let borrowers are considered a higher risk to lenders, the costs associated with buy-to-let mortgages are higher. They have higher interest rates and require larger initial deposits.
On the other hand, the value of the property you choose will most likely be lower than that of your own home.
BUY-TO-LET MORTGAGES AND TAX
The landlord mortgage interest tax relief is a tax allowance buy-to-let investors can benefit from. Although conditions used to be better, landlords can still benefit from a reduced tax bill. It comes in the form of a tax-credit, based on 20% of your mortgage interest payments.
PROS AND CONS OF BUY-TO-LET MORTGAGES
Pros
You can use a buy-to-let mortgage for several purposes. For instance, many choose this option to fund their retirement. Another option is for gaining an additional income. This is provided that the property brings in a larger income than it generates each month (in interest/repayment costs and any other outgoing costs).
Investing in a property with a good yield in an area with potential for growth is what most investors look for. Demand on the rental property market is at an all-time high with lack of housing being a very real and current problem. Increased demand means that the rental income is almost guaranteed. On top of this, by the end of the mortgage, the value of the property goes up, ensuring a financial gain for the investor.
With property prices rising at a steady pace, many consider property investments safer than other financial investments like shares.
Cons
There are still some negative aspects to consider about buy-to-let mortgages. The first one is risk. The market can go down just like it goes up and you need to be prepared for the perhaps unlikely chance this will occur.
Throughout the mortgage period, you may also go through vacancy periods. You need to have a backup plan and a way to cover the monthly mortgage costs in this case. On the other hand, even if the property is not vacant, you could have periods when the tenant cannot afford to or won’t pay you rent. In this case, you need to be prepared to cover the costs yourself for a short period or cover the legal and eviction fees.
Another important aspect is how difficult it can be to navigate the legislation that applies to landlords. It is constantly changing, and conditions are becoming more complex. You need to be prepared to cover any costs relating to fulfilling your legal obligations.
Buy-to-let properties also have higher stamp duty. The surcharge introduced by Government is 3% for any additional property.
Our estate agents are ready to help you learn more about buy-to-let mortgages and support you in finding the right property to invest in. Contact them anytime at 0207 055 0441.
