Buy-to-let mortgages are home loans for people who want to buy a property to then rent to tenants.
If you are a landlord, or planning to become one, this is the mortgage for you.
The main difference between a mortgage being taken out by an owner occupier and a buy-to-let mortgage is the latter tend to have higher rates of interest. This is because a commercial value is usually involved in the purchase of the home.
Buy-to-let mortgages also differ because they are based on how much money the rent is likely to yield. Most lenders require landlords to secure rent that not only covers the annual interest mortgage payment, but exceeds it – so mortgages tend to be of a value of 125% of the property's value. Essentially this is because lender's will expect the landlord to be able to to charge a nminim of 25% (in rental payments) above the monthly mortgage repayment. This means if a landlord were paying off a mortgage at £1,000 a month, the rent would be expected to be at least £1,250 a month.
Like owner-occupier mortgages, lenders will also look at a borrower's income and expenditure. Mortgages on any other properties will also be taken into account.
Yet another difference with a buy-to-let mortgage deal is in the deposit required. Most lenders ask for at least 20% of the property's value to be paid upfront before providing loan. This often means buy-to-let landlords are already homeowners and have a sizeable amount of equity built up in their existing home in order to provide a deposit.
Aside from that, the average buy-to-let mortgage is quite similar in make-up to any other mortgage. They come in the usual forms – fixed-rate deals with interest set for a certain period, trackers, which run in line with the Bank of England's base rate, and self-certified mortgages are all common in lenders' buy-to-let repertoire.
Who are Buy-to-Let Mortgages for?
Buy-to-let mortgages are for anyone who wants to buy a property which they intend to let but requires a loan to purchase the home. Sometimes this person might own their own home and be looking for an extra source of regular income, which they can gain from monthly rent payments. Or they might be someone with their own home who wants to invest in another property as a way of funding their retirement. .
Pitfalls of Buy-to-Let Mortgages
There is more "red tape" involved in taking out a buy-to-let mortgage than an owner-occupier. Prepare to have not only your income and credit rating scrutinised, but also the potential rental yield. Lenders will also base their decision on how much to lend you on any mortgage you have on your current home.
Being a landlord is very hard work. And there are many hidden costs people are unaware of when embarking on their buy-to-let investment. Letting agency management fees, costs of maintenance and potential repairs can eat into budgets. As can the service charge if the property is in a block of flats and is under a leasehold contract.
Tenants failing to pay their rent can be a huge headache. Most lenders urge landlords to make provisions – maybe holding investments elsewhere – in case tenants don't pay or in case interest rates rise.
Landlords, because they are operating as a business, will have to pay tax on their income. When selling a property, any profit made will also be subject to capital gains tax. If a landlord dies the home will be part of their estate and therefore subject to inheritance tax.
Where to buy Buy-to-Let mortgages
Like all mortgages it is important, when looking for a buy-to-let loan, to search for the best deal. Watch out for lenders who charge penalties for early repayment or who don't offer much flexibility when it comes to over or underpayments. If buying your mortgage straight from the lender – a bank, building society or specialist lender – ensure you check both the headline interest rate as well as the annual percentage rate (APR) so that you are aware of the costs and fees.
Buy-to-let mortgages can also be purchased via a mortgage broker, who will search for the best deal and arrange the most suitable option for your circumstances. They will also provide advice on tax in relation to the purchase.