> Buy To Let Mortgage - UK Guide
In a nutshell
A buy to let mortgage is designed to help you buy a property for investment purposes - i.e. to rent out to other people.
Best Mortgage For
Investors, cash rich individuals, professional landlords, people who want to invest in the housing market rather than risk their savings in the stock market, people wanting to buy a holiday home and parents with children at college.
Your mortgage choice used to be a bit limited here but it's now possible to find most types on offer depending on the lender you choose. These mortgages are becoming increasingly popular nowadays and lenders have responded to this by making them more accessible. So, you can get similar types of deals to standard domestic mortgages such as fixed rates, capped deals, discount offers and variable rates, for example.
Typical Amount to borrow
Lenders borrowing amounts vary. Some will base what they will let you borrow on your salary at standard rates (i.e. approx 3-4 times your salary or 2.5-3 times you and your partner's salary for example). Some will use your salary and your expected rental income to make their calculations. But, you'll probably find that the amount you are allowed to borrow will be based on your potential rental income for the property. In this case, your lender will want your income from letting the property to exceed your monthly repayment on the mortgage before they will approve your loan amount.
Lenders expect a higher deposit for buy to let properties with the average borrowings limit set at between 75-85% - so you'll potentially be asked to find up to a 25% deposit. Some lenders will, however, let you remortgage your current home to raise this cash.
Buy to let mortgages have become more popular in general because of the recent boom in house prices. Whilst the stock market has shown disappointing returns in recent years, house prices have risen steadily. So, a buy to let mortgage is one way of investing for the future as property is often seen as a safe bet. These mortgages are often now used by parents with children of college age. As they will now be responsible for paying all accommodation costs, many parents are simply getting a buy to let mortgage for a property in their child's college town. They then bring in extra income by letting out the remaining rooms to their friends. Once their child has finished college, they can either sell the property or carry on letting it. If you are planning on moving into serious property investment and anticipate buying more than one property over time, some lenders will help you to build up a portfolio by letting you remortgage on buy to let mortgages to fund the purchase of new properties. And, if you go for an interest only product you can off set your payments against tax and save some extra cash. So, buy to let mortgages can be used by just about anyone as a 'safe' investment. In the best case scenario, you'll see good returns on your investment in the future and will make a little extra profit right now.
What to look out for
Chances are you'll be charged higher interest rates for a buy to let deal - but you can still get some good rates by shopping around. A good tip is to go for a fixed or discounted deal for a few years and then to switch to another deal or a different lender when that runs out to keep costs as low as possible. You won't be allowed to borrow as much here as you will with a standard mortgage product so you'll need more for your upfront deposit. There are also other financial implications involved in becoming a landlord. For example, you'll have to maintain the property and make repairs - this can eat into your profits quite significantly. You'll also need to take out specialist buildings, contents and legal insurance as necessary. You may also choose to have the property managed by a lettings agency rather than do it yourself - this will cost you an average of 15+% of your rental income. And, some lenders won't give out buy to let mortgages unless you commit to using a lettings agency in the first place. You'll also have tax implications here - your income will be taxable although you can offset certain expenses and costs.
The main problem many consumers come up against is the area in which they buy. It's vital to do research here as you don't want to be paying for a buy to let mortgage in an area with falling house prices. If property prices fall then so will local rents - so you need to be careful that you can cover your mortgage repayments if this does happen. You'll also have to factor in the fact that you might have gaps in rental income between tenants etc.
If you own all or most of the property you currently reside in then you could look at remortgaging that to raise buy to let cash. You can also look at taking out a commercial/business mortgage.