A buy-to-let mortgage is a specific type of mortgage for when you buy property as an investment – somewhere you’re going to rent out to a tenant or tenants, instead of somewhere to live for yourself. If you plan to rent out a property, most mortgage lenders won’t give you a residential mortgage, you’ll need a specialist buy-to-let mortgage. The rules around buy-to-let mortgages are fairly similar to those around regular mortgages, but there are some key differences to be aware of around lending criteria, eligibility and affordability.
Advantages of Buy-To-Let Mortgages
- Generate an income and cover mortgage repayments – Depending on how much rent you charge and the cost of your monthly repayments, you could find that the property pays for itself. You could also make income from rent payments.
- Long term investment and gain – Property is generally a long-term investment. You may see the value of your property increase over time. There is no guarantee however, as the value of your property may fall.
- Offset the costs against tax – You can usually claim back some of the costs of running your rental property on your self-assessment tax return.
Is interest-only or repayment best for Buy-To-Let?
You have two options with a buy-to-let mortgage: repayment or interest-only. A buy-to-let interest-only mortgage means you’ll only pay off the interest each month, so you’ll take home a larger proportion of the rent from your tenants. A repayment mortgage means you’ll be paying off the amount you owe, plus interest, over the time period agreed in your mortgage.
Both have their pros and cons, but many portfolio landlords choose interest-only mortgages to boost their rental profit. This just means you’ll need to pay off the outstanding balance at the end of your mortgage term.
How do Buy-To-Let Mortgage lenders assess how much you can borrow?
Lenders use a rental affordability calculation to determine how much you can borrow and whether they think your buy-to-let mortgage is viable. When assessing your affordability, buy-to-let mortgage lenders will base your loan on the expected rental income of your property. Some lenders can take personal income into account as well to support this application. This is called “top-slicing”.
How big a loan can you get?
The amount you can borrow depends on how much rent you can realistically expect for your property. Most lenders will typically require you to receive 125% of your monthly interest payments in rental income but can sometimes be as high as 145%. As with all mortgages, a buy-to-let mortgage will have a loan-to-value ratio. This is calculated by the size of your loan as a proportion of the total value of the property.
First time buyers
For first time buyers who are priced out of the market in their local area, buying a property elsewhere and renting it out could be a way to get onto the property market. It is possible to secure a buy-to-let (BTL) mortgage as a first-time buyer and landlord. However, your options could be limited, with potentially higher interest rates and larger deposit requirements becoming major obstacles.The good news is, there are lenders who have the right expertise to consider buy-to-let (BTL) mortgage applications from first-time landlords and this is where our knowledge and expertise comes in.
For further information on buy-to-let mortgages, please contact us here.
