Buy to Let Mortgages
A buy to let mortgage allows you to borrow money to purchase a property that you wish to rent out. Buy to let mortgages function in much the same way as conventional mortgages and are generally interest-only, with the potential income from renters being taken into account when both the repayment and overall loan size are worked out.
In this guide:
What is a buy to let mortgage?
A buy to let mortgage is, very simply, a mortgage designed for landlords to allow them to borrow money to buy properties to let.
Generally, buy to let mortgages are interest-only, so the monthly payments do not contribute towards the actual loan being paid off. Rather, each month, rent money received from tenants is used to pay off the interest charged on the mortgage, with the remaining capital being paid off using cash earned from the sale of the property.
Ideally, you want the rent you receive to be enough that you can use it, along with any other income you may have, to make your monthly payments and still have enough to put into a savings account to eventually contribute towards the repayment of the mortgage capital.
Who can get a buy to let mortgage?
Buy to let mortgages are readily available to anyone who requires them and, just like with conventional mortgages, they are available in tracker, variable and fixed rate forms.
The key difference in setting up a buy to let mortgage as opposed to a conventional residential mortgage it is not only your existing income and financial health that are taken into account when the loan value and interest rate are calculated. The lender will also take into account the potential income you’ll make through rent in the future.
As a general rule, you’ll need to provide a larger deposit to open up a buy to let mortgage than you would with a residential mortgage. This is to reflect the higher risk on the part of the lender, since the regularity of the mortgage payments depend on your potential tenants keeping up with their rent payments.
Buying to Let – Extra Costs
As well as the increased deposit required, and the arrangement fees you’ll have to pay to set up a buy to let mortgage (usually 1.5-2%), there are various other costs you should take into account if you’re thinking of becoming a landlord.
As a landlord, you will want to make sure that you’ve got enough money set aside, ideally in a separate account, to keep up with any maintenance costs associated with the property.
Both capital gains tax and income tax are important to consider if you want to purchase a property to let out, but thankfully, you can (for the most part) offset these costs against your rental income.
Letting Agent Fees
Letting agents can be very helpful, dealing with all of the intricacies of actually setting up a property to rent. However, they will charge you for the privilege, often up to 20% of your rental income. You should make sure that you can reasonably afford this in addition to your mortgage payments.
Buying to Let – Location and the Rental Market
It is also important to take note of the state of the rental market in the area where you plan to buy a house.
This also includes working out the market to which you wish to rent – students and families will have very different requirements for example. This applies to both location and the physical nature of the property itself.
Compare Buy to Let Mortgages
If you’re set on purchasing a property to rent out and need to borrow money to do so, then the best thing you can do is compare buy to let mortgages online using a free comparison service like Money Expert’s.
We’ll help you find the best buy to let mortgages with the lowest interest rates so that you can start renting out right away.