> Fixed Rate Buy To Let - UK Guide
In a nutshell
A fixed rate buy to let mortgage is taken out to buy property for letting purposes and comes with a fixed rate deal attached.
Best Mortgage For
Anyone looking to buy a property to let. This type of mortgage is most commonly chosen by property 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.
With a fixed rate buy to let mortgage your payments will be based on a fixed rate of interest for a specified period. Thereafter it will default to a different rate - usually some kind of variable deal. You can arrange these mortgages either on a repayment or interest only basis.
Typical Amount to borrow
You'll have various choices here depending on your own preference and the lender you choose. Some will base what they will let you borrow on your salary at standard rates (i.e. approx 3-4 times single salary or 2.5-3 times joint salaries, for example). Some will use your salary and your expected rental income to make their calculations. And, some will base their decision purely on your potential rental income (here they'll expect your income from letting the property to exceed your monthly repayment on the mortgage).
You'll be expected to pay more in deposit terms for any kind of buy to let deal - this can rise to up to 25% of the property value.
A fixed rate buy to let mortgage deal can make buying letting property much easier in the initial period. It's much easier to budget, for example, when you know exactly how much your repayments will be. And, you can use the period when you're on a fixed rate to save up some cash for future use within the property for repairs and maintenance etc. Buy to let mortgages are in general now viewed as a great alternative to stock market investment - with fixed rate deals they become even more attractive. For example, many buy to let mortgages are now taken out by parents with children of college age. They simply buy a property in their child's college town on a buy to let basis and bring in extra income by letting out the remaining rooms to their friends. With a fixed rate deal on top they can maximise their profits as much as possible. The property can then be sold after graduation or be kept on for investment purposes.
What to look out for
Most buy to let deals are charged at higher rates than standard mortgages but fixed rate deals can compensate for this. You won't see any benefits, however, if interest rates fall and your lender's standard rates fall too. With a fixed rate deal you won't pay more for rate rises, but you also won't benefit when they drop.
One way to maximise your savings is to start out with a fixed rate deal and then change it once it expires to another fixed rate or different discount deal. You need to remember that you may not be able to borrow as much here as you would with a standard mortgage so you'll need a higher deposit. And, you'll have to take into account the financial implications attached to being a landlord - although the savings you'll make with fixed rates can be off-set against these. These expenses can include property maintenance and repairs and specialist buildings, contents and legal insurance. If you choose to have your property managed by a lettings agency - and some buy to let mortgage providers do insist on this - you'll also be paying around 15% of your rental income.
Another thing to consider here with buy to let products are the tax implications. You will have to pay tax on your rental income, although you will be able to off-set some costs and expenses. It's also vital to do research into the area in which you want to buy before you go ahead. It doesn't matter how good your fixed rate deal is, it'll not help you if house prices fall in the long-term. Your rent will then also fall and you may have problems with negative equity if you decide to sell up. Fixed rates can give you some leeway here but you do need to make sure that your budget can cope as well. 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 a remortgage as an alternative. You can also look at other discount options such as capped and discounted buy to let mortgages. Alternatively, you can take out a commercial/business mortgage.