How do buy to let mortgages work?
Over the past few years, more and more people have taken to investing in buy to let property. However, becoming a private landlord should not be seen as an easy way of making money. It can be risky and complicated and it can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will rise. That said, having a second property to let to tenants could reap considerable financial rewards over time.
When buying a second property to let, you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property, if it increases in value over time? The decision may affect the type of property you purchase and the location.
Buy to let mortgages key information
Buy to let mortgages are not too much different to the loans made on residential properties but there are a few subtle differences and some additional related costs too;
- 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.
- 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 will need a steady flow of tenants to pay the rent and help you meet the monthly repayments. Bear in mind that you are not allowed to live in a property yourself, if you have a buy to let mortgage on it.
- The deposit required when purchasing a buy to let property is often higher, typically 25% of the property’s value. The higher the deposit sum you can contribute, the lower the interest rate on your mortgage is likely to be.
- Remember that the stamp duty payable on a buy to let property will be higher than on a residential one.
- The mortgage rate will be higher on a buy to let mortgage.
There are only a handful of lenders who will offer this type of mortgage – we can access them all.
These can be for owners to stay in the holiday home themselves or to let it out to holidaymakers or even in some cases, both*. Generally, these are for properties in England, Scotland, and Wales.
Typically, holiday let affordability is calculated using an average of the property’s high, mid and low expected seasonal rate. A reputable holiday letting agency will need to confirm these rates in writing.
Like with a buy to let mortgage these can usually be arranged on both a repayment and interest only basis. Also, like a buy to let mortgage, a holiday let mortgage may not be regulated by the Financial Services Authority.
*Lenders will limit the time allowed for personal use. Depending on the lender, this can vary from 30 days to 90 days per year.
Key points of a buy to let mortgage
- Rent Potential – the decision as to whether or not a mortgage will be offered is usually based on the potential rental income. In some cases your personal income will also be considered.
- Interest Rate – buy to let mortgages may have slightly higher interest rates.
- Larger Deposit – typically a minimum of 20% or 25% of the property’s value is required as a deposit for a buy to let mortgage.
Whether you are looking to purchase your first investment property or whether you are looking to remortgage your existing property/portfolio we can help, so please give us a call.