The buy-to-let mortgage market is a specialised one. In April 2014 the mortgage industry implemented the changes that came from the Financial Conduct Authority’s (FCA) Mortgage. However, finding the best buy to let mortgage does not need to be a complicated process.
So, is a buy to let mortgage cheaper than a standard mortgage?
Not always. Most buy-to-let mortgages are interest-only loans and therefore the monthly repayments can be cheaper than a repayment mortgage. However, you’re likely to need a deposit of at least 15% before you’re able to borrow and overall fees tend to be higher. The amount you can borrowed is also worked out differently to residential mortgages and is based on both potential rental income and LTV.
Why can’t I get a residential mortgage and rent out the property?
In some cases, a residential mortgage will have a clause that stops you from renting out your property to make money, including AirBNB style rental. Lenders have different policies on this and its best to check first. Ignoring that, and going ahead anyway could land you in trouble. Worst case your lender may decide you’re in breach of your mortgage terms and demand the mortgage is repaid immediately.
What makes you eligible for a buy to let mortgage?
To be eligible for a buy-to-let mortgage, you’ll usually need to either own your own home outright or have an existing mortgage on it. It will also be much easier if you have a good credit history and you don’t have large levels of existing debt. Lenders also usually set an upper age limit – normally you can’t be older than 70 or 75 when the mortgage term comes to an end.
Should I get a repayment or interest only buy to let mortgage?
When you have an interest only mortgage, you pay only the interest on the loan and nothing off the capital. This means that at the end of the term, you’ll still need to find the funds to pay off the outstanding capital balance. With repayment mortgages, you pay off the interest and some of the overall cost of the property each month. At the end of your repayment term, you’ll have paid off both the price of the house – the capital – and the interest on it.
Can I afford a buy to let mortgage?
The MMR (Mortgage Market Review) changed the face of mortgage lending, forcing lenders to pay much more attention to affordability and expenditure rather than simply assessing gross rental income. Lenders view buy-to-let mortgages as higher risk than residential mortgages because they know that many landlords rely on rental income to make the mortgage repayments and if the property is vacant for a period there is no income. Because of this perceived risk, interest rates tend to be higher than residential mortgages. The lender will also demand a larger deposit. So make sure you have factored in mortgage costs, rental income as well as periods during which the property may be unlet.
Typically in the current market you will struggle to borrow more than 75% of the property value, and any lender will look for rental income that covers around 125% of the mortgage repayments. A lender will expect you to prove the rental income potential too.
What additional fees come with being a landlord?
There is the stamp duty – when it comes to buy to properties there is an additional 3% that you need to pay for buy to let mortgages. There are also maintenance costs to the property and ensuring that all certificates are updated, like the gas safety certificate. If you use an agency to manage the letting, then there is a cost associated with that as well.
The Financial Conduct Authority does not regulate Buy to Let mortgages.