If you are thinking about property for others to live in, Moolr have taken a look at what that involves, and the various steps such a move entails. We took a look at buy to let mortgages.
What is a buy to let mortgage and how does it work?
A buy to let mortgage is designed for those looking to purchase a property then rent it out to the public for a profit. Landlords and property investors will be the main beneficiaries of such a mortgage, the property market a huge investment opportunity, especially with a housing shortage in the UK and the desire for a spate of new builds in the near future. Coupled with the astronomic rise in property prices, renting is seen as a much more acceptable alternative for many nowadays, especially young professionals, and those saving before trying to get on the property ladder.
How is a buy to let mortgage different from a regular mortgage?
Buy to let mortgages work differently to normal mortgages because of the knowledge that the property will be purchased in order to make money. The mortgage rate will therefore be calculated on what income it can be expected to bring in through rent payments. The remit with buy to let mortgages generally follows the line that landlords will charge about 125% of their mortgage fees in rent to a tenant – thus giving them a profit margin of approximately 25%. IN addition to this, at least 25% of the property’s value will have to be paid upfront as a deposit. The greater the deposit, the more favourable the interest rate will tend to be, but as a general rule, buy to let mortgage rates are higher than normal mortgage rates.
Repayments work in a similar manner to other types of mortgages, with monthly payments expected and mortgages will be available in multiple formats, such as interest only, tracker or fixed rate.
Types of buy to let mortgages
Interest only – the majority of buy to let mortgages will be interest only. They are most popular for landlords as they are the cheapest in the short-term, as they only have to pay the interest on the mortgage (as the name suggests), and no capital from the value of the mortgage itself. The mortgage type can be changed later on or the mortgage paid off. There is an extra advantage in being able to offset the mortgage repayment against a landlord’s tax bill.
Fixed – this less common mortgage type involves having the same interest rate throughout the mortgage term. The rate will not alter unless the type of mortgage is changed.
Tracker – similar to a fixed mortgage in that the entire mortgage is paid off regularly, this differs as the amounts paid are not fixed but linked to the Bank of England’s base rate, so will fluctuate, and could go up or down.
Am I eligible for a buy to let mortgage?
To be eligible for a buy to let mortgage, a potential landlord must be at least 25 years old, and any mortgage period must end when the individual in question reaches the age of 75. The maximum number of mortgages that can be held at any point is three, and the maximum that can be borrowed £2 million. The borrower must also have a minimum income of £25,000.
Naturally, those with a good credit rating will be favoured by lenders. Underwriters will check what outstanding debt a potential borrower has, what mortgage payments have been made in the past, and if credit has been repaid on time. A lower credit rating may lead to higher interest rates for successful applicants.
Things to consider when applying for a buy to let mortgage
There will be an arrangement fee for buy to let mortgages, and these fees tend to be higher than for a traditional mortgage. As a general guide, the fee is usually between £1000 and £3500. It is important to take this cost into account before taking on a buy to let mortgage.
Another thing to consider is the investment return, and whether it is sufficient to proceed with a property purchase, and consider if it is financially viable once deducting the costs of the mortgage repayments and any home improvements that the property may need. Research should be done on the area you decide to purchase in, to see if there is a healthy demand for rented accommodation, and also if properties stand a good chance of maintaining or increasing in value. Thus, a thriving and “up-and-coming” area is a good place to invest in.
Finally, be aware of possible extra costs should you decide to sell a property further down the line. One cost will be capital gains tax if sold for a profit. As a business opportunity, it is important to do the maths and consider all the costs for all possibilities.
Risks of buy to let mortgages
Making profit on a property relies on regular payments from a tenant. IF the tenant does not make repayments, the mortgage will still need to be paid off each month, so naturally it is important to find a tenant that you trust and are confident is in a position to make regular payments as per their tenancy agreement. Tenant repayments should be monitored at all times.
There is also the small risk of a property’s value depreciating. This will impact on investor returns, as rent may have to be reduced to mirror the property value, and any sale would see a loss on returns.
The final point, and perhaps the most important of all, is that a failure to make regular mortgage repayments can result in the repossession of a property, and also incur extra charges, whilst damaging the borrower’s credit rating.
