Whether you’re investing in your first property as a landlord, growing your existing portfolio or are looking to rent out your current home and need to switch your mortgage, it is important to fully comprehend, understand and consider all of your buy to let mortgage options.
At Bower, our expert advisors seek out the very best deals available in the whole market and talk you through various options providing impartial, honest advice to help you secure the most suitable buy-to-let mortgage plan.
What Is A Buy To Let Mortgage?
A buy-to-let mortgage, also referred to sometimes as a ‘buy to rent’ is specifically for properties that are purchased or owned with the intention of being rented out to tenants.
Sometimes homeowners with a standard mortgage on their existing property decide to move house but instead of selling, they decide to keep it and rent it out which is sometimes referred to by lenders as ‘Let-To-Buy’.
When this happens you must swap over from a residential to a buy to let mortgage. Renting out a property without the correct mortgage in place could breech the terms of the agreement and put owners at risk of losing their home.
How Do Buy-To-Let Mortgages Differ From Standard Mortgages
As a Buy-To-Let mortgage is for purchasing a property that you’ll be letting out, your choice of lenders will be greatly reduced if you don’t already own your own home.
This is because these mortgages differ from standard mortgages in the following ways:
- Interest rates are increased
The interest rates on Buy-To-Let mortgages are usually higher as lenders feel the level of risk is greater. Tenants rarely maintain your property to the same standard they would if they were the owner-occupiers. There may also be times when the rental income does not cover the mortgage payments, or when you have periods of vacancy between tenants.
That said, there is insurance available to cover this.
- Higher minimum deposit
Lenders prefer it if you to have a larger personal stake in a Buy-To-Let property as it reduces their risk. A minimum of 25% is often required, although many of the best deals want up to 40%. There are buy-to-let mortgage lenders out there who require only a 20% deposit, but in these cases the lender will increase the interest rate charged and arrangement fee, due to the higher risk.
- Further age restrictions
Most banks and building societies insist on a minimum personal age for Buy-To-Let of 21. Each lender will have their own upper age limits too, usually between 70 or 75, although this is your age when the mortgage ends, not when it starts. For example, if you’re 50 when you take out a 20-year mortgage it will finish when you’re 70.
But there are some lenders who do not have an upper age limit for when the mortgage needs to be repaid.
- Interest only
Most Buy-To-Let loans are interest-only, not repayment. So just like a standard interest-only mortgage, you only pay the interest each month and have to clear the capital debt at the end of the mortgage term. This may mean that the property will need to be sold.
A mortgage is a huge financial commitment, it is always advisable to speak to a professional, qualified buy to let mortgage broker before you make any decisions or commit to anything. At Bower, our team of experts can help you find the very best buy to let mortgage for your needs.
Types Of Buy To Let Mortgages
Just like with residential mortgages, there are many different options available for buy to let mortgages including tracker, fixed, discount, offset, variable or capped interest rate.
Consumer Buy-To-Let mortgages
Since March 2016, Buy-To-Let mortgages come under two different types:
- Consumer Buy-To-Let mortgages – This is when a property you own has become a rental property. This could be a property that was inherited, given or that you used to live in (and still own) but now rent out. Most consumer Buy-To-Let landlords will only have one property like this. Consumer Buy-To-Let mortgages are regulated and supervised by the Financial Conduct Authority (FCA).
- Business Buy-To-Let mortgages – These are mortgages purely for professional landlords and are not covered or supervised by the FCA.
At Bower, our expert buy to let mortgage advisors can offer help and advice for both types of these mortgages, just get in touch with us now to find out more.
What is a buy to let mortgage?
A buy-to-let mortgage typically involves the purchase of a property with the intention of letting it out to somebody else. Buy to let mortgages are an option for both first time investors looking to enter the rental property market or for experienced landlords with large portfolios. Homeowners can also switch from a residential mortgage to a buy to let if they intend to move out of their property but wish to continue to own it and rent it out.
The mortgage repayments are paid by the owner who then rents out the property to a tenant at a monthly rental rate that covers the mortgage costs as well as other expenses such as maintenance, agents fees etc.
Profits can be made from any extra money left over from the rental charges and the capital growth once you decide to sell the property.
What is the criteria for a buy to let mortgage?
It will differ from lender to lender but typically there are certain things that will be taken into account when deciding eligibility for a buy-to-let mortgage:
- Income – A minimum annual salary of around £25,000 will need to be declared in order to ensure that you have an income to fall back on if the property becomes vacant for a period of time or the rent doesn’t fully cover the repayments.
- Rental income – Many lenders require that the rent be at least 125% of the monthly mortgage payments.
- Experience – Some lenders prefer only to lend to those who have experience in being a landlord already, although some may consider it if you have previously rented out your home with consent to let.
- Other properties – With most lenders there is a maximum number of mortgaged buy-to-let properties that you are allowed to have at any one time (typically 4). There can also be restrictions on mortgaged residential properties you own, for example, you may not be granted a buy-to-let mortgage for a property that is worth more than your residential property.
How does a buy to let mortgage work?
The repayments you will need to make depends on the type of buy-to-let mortgage you go for and the deal you get. Typically you will need a deposit of between 20% to 40% of the property’s value, but around 25% is about average.
Once you have your buy to let property there are potentially two different ways in which you can earn a profit.
- Rental Yield – The rent that your tenants pay should cover the mortgage and after running costs, agents fees, repairs and maintenance could generate a small monthly profit.
Capital Growth – Whether it’s after 1 year, five years or once the mortgage has been completely paid off, if you choose to sell the property for more than you paid for it then you can make a profit.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Some buy to let mortgages are not regulated by the Financial Conduct Authority.
Bower Mortgages provides impartial whole of market advice with an award winning customer service experience. There will be a fee for mortgage advice. The precise amount will depend upon your circumstances but a typical fee will be £595 on completion of the mortgage.
Bower Mortgages is a trading style of Bower Retirement Limited and is Authorised and Regulated by the Financial Conduct Authority. Financial Services Register Number: 451607
Speak to one of our dedicated customer specialists or arrange your free, initial no-obligation quote by calling us on freephone 0800 411 8668.