The UK’s property market is notoriously resilient. Crashes are very few and far between. There are occasional low periods. In practice, however, all these mean is that house-price growth slows and properties can take a bit longer to sell. Demand for rental property is generally strong. With that in mind, here is a quick guide to buy-to-let mortgages.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a mortgage to purchase a property intended for use as a standard residential letting. You do not need a buy-to-let mortgage if you want to let out a room in your own home. With that said, you will need a standard residential mortgage that allows this.
Likewise, a standard buy-to-let mortgage is not suitable for buying commercial property. This includes property that is intended to be used for short-term letting (e.g. staycation property). If this interests you, then you need a mortgage for commercial property.
What buy-to-let mortgages are available?
As with mortgages for residential property, you can get both repayment and interest-only buy-to-let mortgages. In complete contrast to the residential-property market, however, interest-only mortgages are commonplace rather than niche.
The main reason for this is that they are more affordable at the outset. Over the long term, however, repayment mortgages can easily become the more economical option. This is because repayment mortgages, as the name suggests, repay the capital as well as the interest.
This means that, over time, the amount owed reduces. As it does, the amount of interest charged also reduces. The end result is that you can end up paying less interest overall. You also build up equity in the property and end up owning it outright. This can be an important point. Landlords should not rely on selling a property to pay off a mortgage.
Also, as with the residential property market, landlords can choose from variable-rate and fixed-rate mortgages. Both deals are available for various lengths of time. The benefits and disadvantages of variable- and fixed-rate mortgages are essentially the same as for the residential property market.
In short, variable-rate mortgages can be more economical overall but do leave you exposed to fluctuations in mortgage rates. With fixed-rate mortgages, you have security for the length of the deal. This security can, however, come with a price premium.
Qualifying for a buy-to-let mortgage
As with residential mortgages, the exact criteria for getting a buy-to-let mortgage typically vary. This is partly down to lenders’ policies (especially their appetite for risk). It’s also partly due to overarching market conditions. In general, however, lenders evaluate applicants for buy-to-let mortgages similarly to applicants for residential mortgages.
You’ll be expected to have a deposit. As always, the more you can put down, the more likely it is that lenders will be interested in you. Currently, you should be looking to put down a minimum of 25%. When calculating how much you can afford, remember to allow for transaction costs, particularly the Stamp Duty surcharge.
Lenders assess both the income you can expect to receive from the property and your own income. The fact that lenders want you to have an income means they generally want you to have paid off your buy to let mortgage by a certain age. Currently, this is around 70-75. It may be increased or removed in future due to the Equality Act 2010 and/or social changes.
Remember that lenders will be interested in your net income. That means you will need to show that your calculations allow for maintenance, repairs and voids. Even so, you may be required to have landlord’s insurance and/or life insurance. These are to protect your lender but they can also protect you and your loved ones.
If you require mortgage advice and would like to speak to one of our advisors, please get in touch.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Some buy to let mortgages are not regulated by the Financial Conduct Authority