There are various ways that a potential property investor can learn more about buy to let mortgages and this article will help.
Firstly, though, it’s probably best to answer the question, “What is a buy to let mortgage?”
Essentially, a buy to let mortgage, also known as a BTL mortgage, is a type of secure loan for those wanting to buy property – whether that’s a flat or a house that they will then rent out to tenants.
It needs to be appreciated that a buy to let mortgage will usually need a bigger deposit than is required for a residential mortgage and the interest rates on BTL mortgages tend to be higher.
Buy to let mortgage interest rates
As mentioned, the interest rate for a buy to let mortgage will differ than the rates being offered by lenders for a residential mortgage and a BTL mortgage calculator will underline this.
One reason for this is that the lender will be looking for extra security in the form of a larger deposit and a potential borrower needs to appreciate that their rental home may not have any tenants paying rent, this is known as a void period.
Also, should a tenant fall behind with their rent, this may lead to a situation where the landlord – that’s you as the property investor – may need to defer their mortgage payments.
Types of buy to let mortgage
The rate of interest that a lender will levy will depend on the type of buy to let mortgage you have, and also how much rental income you are expecting from your property investment and how much you need to borrow. The BTL mortgage types are:
- Fixed rate BTL mortgage: This is a mortgage with a fixed repayment amount over a given period. Usually, the longer that the fixed period is for, the lender will charge a high level of interest.
- Discount variable BTL mortgage: These types of mortgage will use the lender’s standard variable mortgage rate and then will apply a discount. Should the variable rate fluctuate, then your mortgage rate will fluctuate alongside it, but the discount will be the same.
- A BTL tracker mortgage: The opposite of having a discount variable mortgage will be a tracker mortgage where the interest rate will be set at a percentage figure above the lender’s variable rate. This means that the Bank of England’s base rate will be marked up and should this rate fluctuate, then your tracker mortgage rate will vary too.
Variable or fixed interest rate for your buy to let mortgage
You will need to decide whether you need to get a variable or fixed interest rate for your buy to let mortgage.
Before making a decision, you need to understand what your personal preferences and circumstances are. This means that:
- Variable rate BTL mortgages: Your mortgage payment could go down or up as the interest rate changes.
- Fixed rate BTL mortgages: The interest rate and the monthly payments will be the same for the agreed length of time. This is usually two, three or five years but some lenders have other terms. When the deal ends, you will be switched usually to the lender’s standard rate of interest unless you switch to another product or re-fix.
Is a buy to let mortgage for you?
There’s no doubt that buy to let mortgages are a great way for new landlords as well as seasoned property investors to enjoy buy to let opportunities in the UK. However, not everyone will be entitled to take out a BTL mortgage because the lending criteria have tightened in recent years.
Also, there may be an issue for some borrowers because the lender may require a deposit of between 25% and 40% for a BTL mortgage and they are more expensive than typical mortgages.
How does a buy to let mortgage work?
For those wanting information about financing their property investment, you may be needed to know, ‘How does a buy to let mortgage work?’
Since most borrowers will be looking to take out an interest-only buy to let mortgage for their property means they only pay the interest on the loan, which will accrue every month. They will usually pay this from the rent they are paid and the full amount of the mortgage, known as the capital, will be paid when the agreed term ends.
It also needs to be appreciated that interest-only buy to let mortgages tend to have lower repayments.
A buy to let mortgage lender
So, what will a buy to let mortgage lender be looking for?
The amount you can borrow with a buy to let mortgage lender – especially a reputable one that is regulated by the Financial Conduct Authority (FCA) – will depend usually on your personal circumstances – you’ll need to earn at least £25,000 – and the deposit you are putting down.
The deposit requirement is much larger than that needed for a residential mortgage since this will help protect the lender should you default on payments, which may happen if you struggle to collect rent, for example.
Also, the rental income for your property will also be important and the lender will be looking for a rental income of at least 125% of the mortgage payment.
Buy to let mortgage deal
This is also the point to highlight that for anybody taking on a buy to let mortgage deal, and if it’s an interest-only offer, then the loan will need to be repaid when the term ends.
You will need to either sell the property to repay the loan or you could extend your mortgage with your current lender or find another mortgage provider.
The issue here, for those who decide to sell up, is that there may have been a market rise in house prices so their equity has increased, though you may be liable to capital gains tax.
The downside is, if house prices have fallen then you’ll need to repay the difference between the selling price and the outstanding mortgage amount yourself.
Buy to let mortgages in the UK
One of the best ways to learn more about buy to let mortgages in the UK is to speak with a financial adviser or a buy to let mortgage broker. They will be able to explain your potential options and what BTL lenders are looking for from borrowers such as yourself, but there’s no doubt that research is key to ensure that you not only access the BTL mortgage deal that is right for you, but is right for your rental property investment.