Buy-to-let mortgages - a quick-start guide
With the private rented market buoyant again, interest in buy-to-let property has enjoyed a resurgence.
Landlords are enjoying high demand for their properties, and rental incomes are at new records.
But becoming a landlord for the first time can be a confusing task. Finding and choosing the right mortgage is amongst the most important and potentially most difficult of those tasks.
Your choice of buy-to-let mortgage could have a significant impact on the profitability of your investment. So where do you start?
Fixed vs variable
This is one of the most important distinctions to understand when shopping for a mortgage. As with residential mortgages, there are a number of different loan types on the market. The two most common of these are fixed and variable rates.
Fixed rate mortgages have a steady cost throughout their term. This can make financial planning much easier, as you know how much you will be paying each month. Variable rate mortgages, on the other hand, are linked to either the lender’s own interest rate (these deals are normally known as ‘standard variable rate’ mortgages) or to the Bank of England base rate (often referred to as a ‘tracker’).
You may also be offered an introductory deal, in which you pay a special rate for a certain period. These can often be the most cost-effective solutions, but you will need to do some careful sums to ensure you are getting the best possible deal.
You should note that rates for buy-to-let mortgages tend to be higher than those offered on residential loans. Arrangement fees can also be significant.
Interest only vs repayment
The next major choice is between an interest only and a repayment mortgage. With an interest only loan your monthly payments will only cover the interest. With a repayment mortgage you will pay back both the interest and the loan itself.
Interest only mortgages have traditionally been popular amongst buy-to-let landlords. This is partly because interest payments can be offset against rental income for tax purposes.
The loan-to-value (LTV) ratio is another crucial factor in your hunt for a buy-to-let mortgage. The LTV is another way of expressing the deposit you will be required to put down. At the time of writing some of the best deals on the market had maximum LTVs of between 65 and 75 per cent. This means that you would be required to put down a minimum deposit of between 25 and 35 per cent.
It is worth remembering that the highest LTVs (or, put another way, the lowest deposit requirements) are generally reserved for those who have the best credit histories. Similarly, lower LTVs tend to be cheaper.
How do lenders assess applications?
It is also important to note that lenders will consider a different set of factors when assessing a buy-to-let mortgage application. While they will obviously still look at your credit history, lenders will tend to consider the prospective rental payments you will receive as your primary source of income. You will normally have to provide independent verification of the amount you expect to make from your property. In some cases the lender will also take other sources of personal income into account – but in these cases they will generally lend less to those who already have a personal mortgage.
You should remember that lenders will generally require that your income is equivalent to at least 125 per cent of the required repayments. This is designed to ensure that you will be able to make the payments even during void periods.
Your buy-to-let mortgage is a crucial element of your property investment strategy. If you are in any doubt you should speak to a broker or other professional advisor before continuing.