What Is A Buy To Let Mortgage and Is It Right for Me?
The property market is big news these days, and reports on second homes and the state of the rental market are go-to stories for many of the major networks and newspapers. However, if you are not in the know, some of the terms banded around can be a little confusing. One such term is ‘buy-to-let mortgage’.
So, what exactly is a buy-to-let mortgage?
Buy-to-let mortgages are specifically aimed at landlords who wish to invest in the property market and provide rental accommodation at the same time. While they are generally more expensive than a standard mortgage, they are often the only way for prospective investors to start their property portfolios.
Can anyone get a buy-to-let mortgage?
In essence, yes, anyone can get a buy-to-let mortgage, but there are one or two things that may prove to be a stumbling block for some. The first factor is whether or not you already own your own home. This can mean owning the property outright or with an existing mortgage.
As you would expect, a good credit rating is another basic requirement when obtaining a buy-to-let mortgage. Not only that, your current spending habits must be in control too. If you are maxed out on every card you own and have lots of other outgoings each month then the chances are good that your application will not be approved.
The final factor is age. The vast majority of lenders will have an upper age limit on when your mortgage will end. Should that be 70, then a 45-year old would only be able to get a 25-year mortgage, not 30. There was, however, a recent case won by a couple challenging this ruling, so things could change in the future.
How do buy-to-let mortgages differ?
Whilst similar to standard mortgages, buy-to-lets do differ in some ways. Firstly, the deposit needed to take out a buy-to-let mortgage is generally higher than that of a regular mortgage. As a general rule, lenders will want to see at least a 25% deposit for buy-to-let properties. This can fluctuate from one lender to the next, but as a rule of thumb 25% should be your aim.
As with the deposit, the fees that you can expect to pay will be higher too and the trend continues with the rates of interest that you will need to pay each month. Therefore, doing your sums before taking on a buy-to-let mortgage is absolutely vital if you want to become a successful landlord.
Is there a limit on what you can borrow?
The amount that you can borrow from a lender is directly linked to the amount of rental income you predict that the property will generate. Most mortgage lenders will want to see around 25 – 30% more rent coming in from the property than is going out in payments.
When making your calculations it is important to factor in the cost of obtaining the mortgage too as failing to do so can skew your figures somewhat.
Who offers buy-to-let mortgages?
As buy-to-let has increased in popularity, so have the amount of lenders willing to offer mortgages to support the demand. The vast majority of high street banks now have specific buy-to-let mortgage offers available and there are quite a few companies that specialise solely in this type of lending.
Doing your homework is important at this stage, but a reputable and reliable mortgage broker can help if you prefer to have someone else do the legwork for you.
Reports in the media concentrate mainly on the people making vast sums of money through buy-to-let, but as with any investment there are risks associated with the property market.
Plan for the future as much as possible. Take into consideration times where the property may be without tenants. How will you meet the repayments and other costs associated with owning a property without the regular rental income?
Selling the property in times of financial distress is not always a solution either. If there has been a correction in the market when you need to draw your money out then you could be left with negative equity, a difference that you will be expected to make up.
Buy-to-let is an interesting proposition for many, and if you go into the property market with your eyes open it can be a fantastic vehicle for growth. Do your research, make the basic calculations, and follow your gut. If it feels right to you and the figures are in agreement, buy-to-let could be the ideal investment opportunity for you.
If you enjoyed this blog post then perhaps you’d like to read “Ways to Increase Buy-To-Let Profits“?
Feature image credit: Christian Schnettelker via Flickr.