How does a buy to let mortgage work?
A buy to let mortgage is the same as any mortgage in that you borrow the money you need to purchase the property from a bank or lender and pay this back on a monthly basis with added interest.
With a BTL mortgage, however, there are some key differences, including;
- A higher deposit amount (usually upwards of 25% of the total value of the property)
- More expensive fees to pay
- Typically higher interest rates
Why do they cost more?
These higher costs exist as buy to let mortgages are considered more high risk compared to a standard mortgage. This is because unlike other loans, a BTL mortgage relies on the tenant in order to pay it off. There is also the risk that a tenant might stop paying at any point, or you might have difficulty finding anyone to rent the property at all.
Interest only mortgages
Most buy to let mortgages are interest only, which means you only pay the interest amount on the loan each month, and then pay off the full amount borrowed at the end of the term. Many landlords choose to save the rent they make on the property and use this to help pay off the capital in full. Some choose to keep the property with the assumption that it will increase in value, using the profits to help pay off the mortgage when they sell.
Who can get a BTL mortgage?
Like with all mortgages there are requirements that you need to meet in order to be eligible. Before applying for a buy to let mortgage you should consider the following;
- You can afford it – As deposits for buy to let mortgages are generally higher than ordinary mortgages you may need to save beforehand. Along with this, you should ensure that you can still afford to pay the mortgage if a tenant leaves or misses any rent payments.
- You have a good credit record – With a high-risk mortgage, banks and lenders want to know they can rely on you to make your mortgage repayments each month. They will look at your credit record in order to check this and are unlikely to approve your mortgage application if you have a poor credit history.
- You earn more than £25,000 a year – Typically lenders won’t consider your BTL mortgage application if you earn less than this amount.
Other BTL considerations
It’s likely that you will struggle to get a buy to let mortgage if you don’t already own your own home. If you aren’t in this position it’s recommended that you wait and look for a buy to let property when you are.
When investing in a rental property, you will also need to ensure you can afford the added costs associated with it. This can include; house maintenance, any agency fees to advertise and manage the property and capital gains tax on the rental income where the profit you make is above your annual tax-free allowance. Capital gains tax is also payable if you sell the property for more than you originally paid for it.
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Why Clever Mortgages?
At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home. We provide access to a comprehensive range of mortgages from across the market. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only recommend products that meet your needs.
A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.
The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.
Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.
This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.
A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as they can allow you to pay slightly less than the bank's standard rate. However as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.
A tracker mortgage is basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate, the most common rate that is tracked is the Bank of England Base Rate.
A capped mortgage is the same as a variable rate mortgage; however the interest rate can never rise above a set “cap”. These mortgages can work well for people who can budget for different mortgage repayments each month but want the reassurance that their payments will never go above a certain amount.
Offset mortgages are linked to your savings account. Instead of earning interest on your savings, the money is offset against your mortgage. As a result, you pay less interest on the mortgage debt.
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