Are you thinking about becoming a landlord? A Buy to Let mortgage can offer you an excellent way to benefit from another source of income and start investing in the property market. However, there are some careful considerations before you proceed with a mortgage application; there are some key differences between them and traditional mortgages to be aware of.
You’ll need a larger deposit
When you’re applying for a mortgage to purchase a home, it’s common to need a minimum deposit of 5-10%, there are even some mortgages available where you don’t need any deposit.
However, with a Buy to Let mortgage, you’re often viewed as a bigger risk by lenders. As a result, you’ll need more capital to put down as a deposit from the outset. It’s common to need between 25-40% of the property’s value to be approved for a mortgage. This may limit the property market that’s open to you and restrict your options.
Other fees can cost more too
It’s not just the deposit that makes buying a property expensive either. You may find that other costs associated with a mortgage, such as solicitor fees, cost more when you compare them to a traditional mortgage. There are a number of reasons why this may be the case, the additional paperwork required for example. As the property is an investment, it may be wise that you take steps to ensure there aren’t any surprises by paying for additional searches, including those that are optional, adding to your costs.
Most Buy to Let mortgages are interest-only
While most mortgages available on homes require you to make repayments to reduce the loan, Buy to Let mortgages usually pay the interest only. There are pros and cons to this.
The key advantage is that monthly payments will be significantly less. This can make it easier to cover void periods when the property is empty and increases your profit in the short term.
However, it also means you’ll still owe the amount borrowed at the end of the mortgage term. You have two options here, either make provisions to pay off the capital at the end of the term or sell the house and use this to repay the mortgage. If property prices have increased, you could make a further profit here. Of course, there’s no guarantee that property prices will rise. If they fall, there is a risk you’ll end up in negative equity, where you owe more than the property is worth. The larger the deposit you put down, the less risk there is of this occurring.
Buy to Let mortgages usually have higher interest rates
While you may only be paying the interest on a Buy to Let mortgage, the cost can be a little higher if you’ve been making calculations based on a standard mortgage. This is, again, because you’re viewed as a greater risk by lenders.
As a result, you can expect the interest rate you’re offered to be around 1-3% more than that on a comparable traditional mortgage. The good news is that interest rates are still low following the financial crisis, though they are expected to start rising again.
Rental income affects borrowing
When applying for a mortgage to purchase a home, it’s your income and expenditure that dictates how much you can borrow, with the property itself playing a role too. With a Buy to Let mortgage, the property you want to purchase has a much greater influence. This is because the maximum you can borrow will be linked to how much rent it’s expected to yield.
As a general rule of thumb, you’ll need to show that the income coming in from rent will be at least 125% of your mortgage repayments, though this varies between lenders and may be as high as 145%. This gives you some leeway should you experience periods where the property is empty. The rental value of the property will be verified by a surveyor.
This will be a critical role in where you look for a property. You’ll need to ensure there is demand from tenants who are willing to pay the amount needed. As with a traditional mortgage, lenders may also evaluate how likely you are to hit the rental yield target if rising interest rates were to mean higher repayments.
There may be age restrictions
Many lenders have age restrictions when you apply for a traditional mortgage, as they want to ensure you’ll have the income to meet repayments over the full term. It may surprise you to know that the same restrictions may apply for a Buy to Let mortgage even though you may not be making repayments from other income sources. Typically, those over the age of 75 will find it more difficult to secure a Buy to Let mortgage. However, this age is gradually rising and there are specialist lenders you can approach.
If you’re hoping to secure a Buy to Let mortgage, we can help you. By helping you secure the right deal, we can help you get the most out of your property investment.