June 10

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Buy-to-let mortgages: what you need to know


Demand for rental properties is on the rise, so buying a rental investment property may be a great way to bring in extra income every month. In fact, the latest private rental sector report published by the ARLA reveals that approximately 6 in 10 letting agents saw an increase in rent in September 2019. Plus, the average U.K. property rent sat at approximately £953 in October 2019.

However, there’s one major wrinkle you need to iron out before you invest in a rental: how you plan to pay for it.

Before we discuss the risks involved in a buy-to-let mortgage, let’s discuss the basics:

What is a Buy-To-Let mortgage?

A buy-to-let (BTL) mortgage is a loan taken to buy a property that’s rented out to tenants. It can also be used to remortgage a property the owner intended to live in at first, but had to move out of and let out.

While BTL mortgages may seem similar to residential mortgages, there are some key differences between the two.

Read on to find out how buy-to-let mortgages work before you take the plunge.

What is different about a buy-to-let mortgage?

Unlike typical residential mortgages, most BTL mortgages are offered on an interest-only basis. This means that for each month of your mortgage term, you’ll only pay off the interest on the loan, and none of the capital.

While this is good news in the short term since your outgoings will be less each month, the downside is that you’ll need to repay the original loan in full at the end of the mortgage term. So, it’s imperative that you have a clear plan in place on how you do this.

Usually landlords do this by selling the property, remortgaging, or paying the loan off by savings they’ve build up elsewhere.

How much can you borrow for BTL?

The maximum amount you can borrow depends on the rental income you expect to receive.

Because of the higher risk involved, you have to pay a larger deposit for buy-to-let mortgages compared to other types of mortgages. This is usually 25% of the property’s value. However, this depends on the type of mortgage and the lender (it can vary between 20–40%).

Apart from requiring a larger deposit, BTL mortgages also have higher fees and interest rates. Plus, as of April 1st 2016, you need to pay an additional 3% in Stamp Duty if you a buy a second property either for the purpose of letting or as a second home.

What’s more is that BTL mortgages are not regulated by the Financial Conduct Authority (FCA).

Conclusion

Mortgage providers see BTL mortgages as higher risk compared to residential mortgages because landlords often have trouble with rent collection. Plus, it’s unlikely that your property is constantly occupied.

Find out more about the additional costs and considerations associated with BTL mortgages here.

If you’re having trouble figuring out if BTL mortgages are right for you, get in touch with our buy to let mortgage brokers today. We can help you secure a property at the rightreturn on investment!

 

Your property may be repossessed if you do not keep up repayments on your mortgage

Some buy to let mortgages are not regulated by the Financial Conduct Authority

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