Buy to Let Mortgages
A Buy-to-Let Mortgage is a specialised mortgage specifically designed for individuals or businesses looking to buy a property for the purpose of letting it to tenants.
Key Features
A Buy-to-Let Mortgage differs from a standard mortgage because it is not based on the income of the applicant. A Buy-to-Let Mortgage is based on the rental amount expected to be gained from the property. In order to obtain a Buy-to-Let Mortgage the monthly rental income from letting must exceed 125% of the monthly interest payment.
Buy-to-Let lenders will typically lend up to 85% of the property value. A 15% deposit of the property value is usually provided by the buyer of the property.
There are many variations of fixed and variable Buy-to-Let Mortgages (for a full list see the Glossary section below) but generally there are two types;
- Fixed rates - the interest rate is fixed over a specified time period. This gives you the benefit of a constant and predictable monthly payment but prevents you from benefiting from a decrease in the interest rate
- Variable rates - monthly repayments are dependent on the interest base rate, set by Bank of England.
With 'interest only' Buy-to-Let Mortgages you should consider making capital repayments to reduce the final repayment at the end of the term. It also possible to use the capital gains from the appreciation of the property, to repay the mortgage at the end of the period.
Who is it for?
- Investors - a Buy-to-Let Mortgage is the best means of financing the purchase of an investment property
- Pension alternative - Scepticism in Pension plans has seen an increase in investment properties
- Medium & Long Results - Investment properties generate income from both monthly repayments and capital gains when the property is sold.
Benefits
- Significant revenue source that can offer above stock market returns
- Medium-long term investment that provides steady income and capital gains when property is sold
- Can act to diversify your portfolio in order to decrease risk exposure
Things to watch out for
- Estimating return - Possibility of significantly reduced income when property remains vacant between occupants or requires renovation. When it comes to estimating return, deduct three months of income from the expected annual total.
- Unregulated market - the FSA does not regulate secured loans in which the borrower uses less than 40% of the property and/or the mortgage is secured by a second charge on your home. Therefore Buy-to-Let Mortgages remain largely unregulated.
- Location of property - Managing properties that are located significant distances away from your residence may pose managerial challenges - likely increasing cost and time. Letting a property abroad also will mean different rules and regulations governing the maintenance and legal side of renting a propoerty.
What are the next steps?
- Make an offer for a property that will provide a good source of revenue. Analyse the local rental market to ensure that the property matches local demand. It is also advisable that the property is relatively low maintenance and that it does not require any major repairs once you start letting it to tenants.
- Once your offer has been accepted, arrange your Buy-to-Let Mortgage.
- Investigate and compare different quotes from different lenders. Some of the most competitive rates can only be obtained through going through a broker. To receive comparative quotes
. - Consider hiring a letting agent to help you with some of the administrative tasks such as completing legal paperwork, finding suitable tenants and repairs and tenant issues. Letting agents are costly and can charge as much as 10% of the rent in yearly management fees but are time-saving and reduce some of the risks of investing in property.
Frequently asked questions
Glossary
Standard variable rate - is set above the Bank Base rate determined by Bank of England's base rate. Your costs consequently vary and will float with the base rate. Be aware that lenders are usually responsive when it comes to raising the rate but less so if the base rate falls.
Fixed rate Buy-to-Let Mortgage - if the interest rate is low it might be a good idea to arrange a fixed rate Buy-to-Let Mortgage. You can fix your payments for a certain period of time which has the added benefit of a constant and predictable finance cost. If there is a surge in the base rate it can also be cheaper than a variable rate. Similarly, you do however miss out on potential reductions in the interest rate.
Capped Buy-to-Let Mortgages - work in the same way as a variable rate mortgage but with the difference that you can put a ceiling on your interest rate. Thus, there is a maximum repayment price that your mortgage can never exceed. Compared to a fixed rate you also benefit from reductions in the interest rate.
Trackers - with bank base trackers your lender guarantees that your Buy-to-Let Mortgage matches the going rate of Bank of England. Normally, the rate is set at 1% above base rate.
Flexible - flexible Buy-to-Let Mortgages allow you to make overpayments so that you can rearrange the repayment of your mortgage and pay it back at an earlier date.
LIBOR rates - LIBOR stands for London Interbank Offered Rate. LIBOR rates are similar to the standard variable rate but are calculated every 3 months. This means that you will have a set payment for each 3 month period after which your rate will be adjusted to according to the movements in the LIBOR rate.
Discounted rates - as the name implies it offers a reduction on the standard variable or LIBOR rate mortgages. A discount rate is usually limited to a time period and following its end the rate will resume to the standard variable or LIBOR rate. Normally, the lender specifies in advance that you have to stay with them or pay a charge in order to leave.