What is a buy-to-let mortgage?
A buy-to-let mortgage is used to purchase a property that will be rented or let out as a source of income.
Who uses buy-to-let mortgages?
Buy-to-let mortgages are used by those who wish to invest a capital sum over a long period, for example five to ten years. The mortgages taken out are typically interest-only mortgages, with the repayments covered through rental income received from tenants. The majority of buy-to-let mortgage lenders require a minimum loan-to-value (LTV) ratio of 85%.
What are the benefits of buy-to-let investments?
Buy-to-let mortgaging has becoming increasingly popular in recent years due to the perception that the housing market provides a more stable and secure form of investment than other options such as the stock market. For an initial capital investment, a rented property can provide both a stable source of income and, should the property increase in value, a capital gain at the end of the mortgage period. Buy-to-let mortgages are primarily interest-only for a number of reasons, one of them being tax. Interest repayments on a rental property are tax deductible, whereas mortgage repayments are not.
Are there any disadvantages to buy-to-let investments?
Buying a property to rent brings with it a range of responsibilities. While these may not be seen as disadvantages as such, they are important to bear in mind. For a start, you will be the landlord of that property and required to keep it well-maintained and in a habitable condition. Rented properties must also comply with a number of regulations and laws, such as fire safety rules and a yearly gas certification. Keeping the property occupied is very important, as for any period the property is empty you will have to cover mortgage repayments. This makes choosing the right property an important decision. Once the property is occupied, there is also the issue of keeping it in good condition and ensuring the tenants are reliable.
Buy-to-let mortgages essentially combine the responsibilities of a landlord with the requirements of mortgage repayments. Some of the legal requirements of being a landlord include:
- Organising for yearly gas safety checks to be carried out by a registered technician. A certificate is granted which can be inspected by the tenants at any time.
- Informing the lender that the mortgage is for a buy-to-let property. Many standard forms of mortgage cannot apply to a buy-to-let property.
- Finding home contents insurance and structure insurance that are specific to buy-to-let properties. A number of packages exclude buy-to-let properties in their terms and conditions.
- Before the tenancy begins, making sure all electrical fittings, furniture and white goods are in top condition and compliant with health and safety regulations.
You will also need to:
- Transfer the utilities to your tenant’s names.
- Collect the deposit - a deposit should be equivalent from four weeks to six weeks rent.
How much does a buy-to-let mortgage cost?
A buy-to-let mortgage is exactly the same as a normal interest-only mortgage, with an initial capital amount required and regular payments to cover interest on the loan. Typically a mortgage lender will require rental income to be equal to 125% to 150% of the repayments required by the mortgage, with the excess for other costs such as repairs and maintenance in addition to a buffer if at any point the property is unoccupied.
The landlord receives any rental income received that is above the interest-only repayments, and can keep the money if needed to cover such eventualities. Otherwise, these amounts are a source of income. Costs will vary depending on a number of factors, and are difficult to predict. Older properties typically require more maintenance and repair, and periods where the property is unoccupied can be frequent at times but unheard of for years after. If you use a letting agent, they will take a percentage of the rental fee.
Who provides buy-to-let mortgages?
Buy-to-let mortgages can be obtained either directly or through a wide range of brokers, intermediaries and agents. Many banks, building societies and mortgage companies now offer buy-to-let mortgages due to its increasing popularity in recent years. Brokers, agents and intermediaries will either be paid on commission or charge for their services.
Buy-to-let mortgage products can also be recommended by Independent Financial Advisers (IFAs) who specialise in that market. IFAs are available around the country and provide independent, unbiased advice that is not affiliated or tied to any particular company or product.
How you choose between different buy-to-let mortgages?
Choosing a buy-to-let mortgage is the same as choosing any other type of mortgage. Interest rates, terms, conditions, insurance and costs must all be taken into account.
Flexible mortgages can be of great use to those entering the buy-to-let market, due to the added flexibility of payments and other options such as payment holidays.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.