Buy-to-let mortgage guide
Do you need a buy-to-let mortgage? Despite recent changes, designed to put the brakes on the booming ‘buy-to-let’ market, buying a property to rent out remains a popular choice for many investors.
As a landlord, you’ll now pay more stamp duty and some tax breaks have been removed, but if you find the right property, in the right location, there is still the potential for high returns.
If you’re thinking of purchasing a buy-to-let property, the key thing is to do plenty of research beforehand. Our guide to the basics will put you on the right track.
Decide on an area
Choosing where to buy is one of the most important decisions you’ll make on your buy-to-let journey. You should select an area with affordable properties that will appeal to a wide range of tenants. Most importantly, there must be high demand for properties in the area. Talk to local estate agents who will be happy to pass on their expert local knowledge, or take a look at our blog post about the UK’s current property hotspots.
Do your homework
Once you’ve settled on an area, it’s time to start checking out prices. Keep an eye on property sale prices as well as their rental value. You need to identify the type of house you can afford to buy, and the rent you’re likely to get.
You should aim for the rent to cover at least 125% of your mortgage payments. Any less and prospective lenders may decline your mortgage application. When setting your budget, don’t forget to factor in other costs associated with purchasing a buy-to-let property, such as solicitors’ fees, arrangement fees, furnishings, and tenant-finding services. Remember to include ongoing costs such as maintenance fees and mortgage repayments if the property is empty between tenants.
The mortgage is one of the most important aspects of your buy-to-let investment. You won’t be eligible for a normal residential mortgage, however many mortgage lenders offer loans specifically for buy-to-let investors.
The main drawback is that interest rates on these mortgages tend to be higher than those on mainstream loans. Something else you’ll need to factor in to your calculations.
Qualifying for a buy-to-let mortgage
Most banks and building societies require a minimum income to consider you for a buy-to-let mortgage. This is usually around the £25,000 per year mark. You’ll also need to be aged over 25. Providers may put a cap on the number of buy-to-let loans you have in place at any one time (usually 3) as well as a cap on the total amount you can borrow.
Another big difference is the deposit required for buy-to-let mortgages – usually a minimum of 25%. However, as always with deposits – the bigger the better. If you can put down a deposit of 35% or more, you’ll get the best deals.
Types of buy-to-let mortgages
Just as with a standard mortgage, you can usually choose from different types of buy-to-let loans. These include fixed rate, variable, tracker and discount.
Many landlords choose an interest only buy-to-let mortgage. This means you only pay the interest on your loan each month. You then pay the mortgage off when it is sold. This keeps your monthly repayments down, and most people can offset some of the mortgage interest against their tax bill.
Good to know
Although many people have profited from it in the past, earning substantial amounts from ‘buy to let’ properties is much harder than it used to be, and is not without its risks. Be sure to weigh these up carefully before you decide whether to proceed.