Buy to Let Mortgages
We delve into the confusing world of Buy to Let Mortgages. There have been a lot of changes recently. But Buy to Let Mortgages still have their place.
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Buy to Let Mortgages
Buy to let mortgages are specialist mortgages designed specifically for investment property. Buy-to-let market has grown considerably in recent years. Purchasing a property and receiving a rental income has become a very popular investment. Buy to let is regarded by many as a safe long term plan as in time investor should see property value appreciation.
Previously lenders considered buy to let mortgage to be a more risky business, than residential and as a result were charging higher rates. In the last few years, situation has changed and we have seen a substantial reduction in buy to let rates. Borrowers should be prepared to put a deposit of a minimum of 15%, but more likely 20-25%.
In addition to a large deposit, lenders will expect rental income to cover monthly mortgage payments and often will expect it to be greater than mortgage payments by at least 25% as landlords have to cover maintenance and repairs, pay a fee to a letting agency and pay for a building insurance.
Lenders will require property to be adequately insured and let out on a Shorthold Tenancy Agreement as well as to comply with relevant rules and regulations.
Borrowers own income and credit rating are taken into consideration as they are expected to cover mortgage payments at the periods of void.
As with residential mortgages you can choose between an interest only and a repayment mortgage.
Most Lenders will be happy to accept that the mortgage will be repaid through sale of the property. There are hundreds of products available on the market and you can choose between fixed and variable rates. If you are new to buy to lets, it may be worth speaking to a mortgage Broker and consider different options.
Buy to Let Mortgages – affordability
The fundamental difference between buy to let mortgages and standard owner-occupier mortgages is that the lender will take into account the income potential of the property – i.e. what level of rent you can expect to receive from it. Some lenders may also look at your personal income too but if you are relying on your income to boost your acceptable borrowing level then be aware that any mortgage you have on your own home will also have to be taken into account.
Lenders will generally want prospective rental income to be at least equal to 125% of monthly interest payments so, for example, if the mortgage interest payments were £500 a month your rental income would need to be £625. Lenders are also likely to want the potential rental income to be confirmed by an independent source. This could entail providing a letter from a letting agency verifying the rent they would expect the property to achieve. The extra 25% buffer is there to protect landlords from any unexpected expenses or periods when the property may be vacant in between tenants. However the criteria do vary between lenders.
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