What is a Buy-to-Let Mortgage?
Buy-to-let mortgages have some key differences to ordinary mortgages. Switching to one before renting our your home, or seeking one out when you are buying an investment property can seem like a hassle, but you cannot have an ordinary mortgage if you are planning to let out a property.
So what’s the difference between a buy-to-let mortage and any other home loan?
- More expensive — Buy-to-let mortgages are typically about one percentage point more expensive than residential mortgages. This is because banks view tenants as higher risk than owner-occupiers.
- High fees — Some buy-to-let mortgages also have high arrangement fees – as much as 3.5 per cent of the property value.
- Interest-only — Most buy-to-let mortgages are paid on an interest-only basis. This makes monthly payments cheaper because landlords only pay the interest and don’t have to pay back any of the capital. When the loan matures, typically after 25 years, the capital will need to be repaid, usually by selling the property.
- Loan based on rental income — You don’t have to pass the same affordability tests as you do with an ordinary mortgage. Instead, you normally need to prove that your monthly rental payment will cover at least 125% of the interest-only mortgage payment. It’s worth noting that many lenders use their standard variable rate (SVR) for this calculation, instead of your initial two or five year fixed rate, for example.So if your mortgage (on your lender’s SVR) was £500 a month, you would need to charge rent of at least £625.
- Running costs — Lenders calculate you will need an extra 25% to cover things like letting agent fees, maintenance, insurance and annual safety checks, for example. Bear these costs in mind.
- Large deposit — You will need a deposit of at least 25 per cent of the property’s value to get a buy-to-let mortgage. This means if you were buying a £100,000 house, you would need to put down £25,000 from your own savings.
Who Needs a Buy-to-let Mortgage?
If you’re thinking of buying a house specifically to let, you will need a buy-to-let mortgage
It’s more complicated if you already own a home and are thinking of renting it out. You need to ring your mortgage lender and tell them your plans. They have to give their ‘consent to let’ the property otherwise you may end up in breach your mortgage contract.
Unfortunately, there is huge variation amongst banks when it comes to dealing with accidental landlords. Some will charge you 1 or 1.5 percentage points in extra interest. Others will insist that you remortgage onto a buy-to-let deal, in which case you should shop around for the best deal.
What Sort of Mortgage Should I Get?
Trackers are normally a bit cheaper, but you are taking a bit more risk as your monthly payments could increase in interest rates rise.
If you are worried that the base rate will increase soon, and you might not be able to afford the increase in monthly payments, it’s best to opt for a fixed rate.
If you’re confident the base rate will stay low for several years, and could afford an increase in mortgage payments, opt for a tracker.
You can use a mortgage calculator to work out how your repayments would change if interest rates rose.
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Think Big when It Comes to Deposits
Unlike residential mortgages, you will need at least a 25% deposit if you want to become a landlord, as at any given time there are very few, or even no buy-to-let mortgages on the market that accept less than that. The profit you make will also be seriously affected by the size of your deposit. The smaller your deposit the higher your interest rate, which means smaller profits.
Ideally, its best if you have a deposit of over 40% as then you will be able to access the best interest rates on the market. So if you were buying a house for £200,000, you would need £80,000 in savings to pay the least interest.
What Happens when My Buy-to-Let Deal Comes to an End?
It’s vital to take action a couple of months before your initial fixed or variable rate ends.
- Look at our best-buy deals to see if you can remortgage onto another cheap rate. Otherwise you will be automatically placed onto your lender’s standard variable rate (SVR). These are normally much higher rates than the rest of the market and will mean a sharp increase in your monthly payments.
- Bear in mind that buy-to-let arrangement fees can be very high, which makes it expensive to keep re-mortgaging to a cheaper interest rate. So you could choose a longer term deal – such as five years – instead of two years if you’re confident you won’t need to sell the property in that time.