What is a Buy to Let Mortgage?
A buy to let mortgage is key when it comes to buying a home you are planning on renting out. Whether you are a landlord looking to expand your portfolio, or thinking of buying a property to rent out for the first time, our team at Northern Property Finance can help.
As the name suggests, the purpose of a buy to let mortgage is to allow you to rent the property you are purchasing, or remortgaging, to a tenant for investment purposes and profit. There are some fundamental differences between a normal residential mortgage and a buy to let mortgage:
- You would require a larger deposit to purchase a buy to let
- You can apply for an interest only mortgage – this would keep monthly payments lower compared to a residential repayment mortgage. However, you would only be paying the interest which would mean the full mortgage would need to be repaid at the end of the term.
- Rates are on average higher than residential mortgage rates
- You cannot apply for a residential mortgage for a property you wish to rent out The amount you can borrow can be assessed on income AND the projected rental income you will receive for the property
- Lenders may charge slightly higher fees for arranging a buy to let mortgage
Purchasing a property to rent out can be a great investment and source of income, our advisor will help identify the benefits of a buy to let mortgage and how it can benefit you now and in the future.
What types of buy to let products are available?
Essentially there are two main types of buy to let mortgages, similar to residential mortgages you have access to fixed rate products or variable products. With a fixed rate product you have the option to fix the rate for a number of years to stabilise your monthly payments and allow you to budget. This option will ensure you don’t have the worry of increased monthly payments, which could in turn reduce your profit from the rental income. However, lenders may charge a fee should you wish to sell the property or repay the mortgage within the fixed rate.
In comparison, variable rate products are available such as Tracker Rates, which track the Bank of England base rate plus a lender percentage, Discounted Rates in which the lender offers a discounted standard variable rate, or Capped Rates where the rate is still variable but is capped at a certain level. You can benefit from a variable rate when the rates are low however your monthly payments may increase as the interest rates fluctuate.
It’s important to identify the impact of both products available and what would be more beneficial to you, our advisor is on hand to explain to positives and negatives and offer the most cost effective, future proof solution.
Additional costs to consider with a Buy to Let Mortgage:
- Buildings/Contents Insurance – You will need to ensure the property has building insurance for lender purposes but also consider contents insurance for any furnishings included within the rental agreement.
- Property Maintenance and Upkeep – Consider any repairs or decoration needed on the property before and after a new tenancy agreement is signed.
- Letting Agent Fees – If you need full management of the property a letting agent will able to assist and market the property for potential tenants, however they will charge a fee for this service.
- Ground Rent/Service Charges – Only applicable to leasehold properties such as flats or apartments, this can be incorporated in the rent charged to the tenant or can be paid by the landlord.
- Furnishings – It’s important to consider the cost of furniture should you wish to rent out the property part-furnished or fully furnished
- Stamp duty – Additional stamp duty charges on the purchase of a second home should be considered
Can you rent your current residential property?
If you’re considering moving home and want to keep you current residential property you’ll need to get a buy to let mortgage. Some lenders grant you the option of a ‘Consent to Let’ which is essentially your lender allowing you to rent out your property by switching you on to a buy to let interest rate, not all lenders allow this however. It’s important that you receive this formal permission from the lender as you are unable to rent out the property without it and you would be in breach of your mortgage if you did so. Alternatively would be to remortgage from your residential mortgage onto a new buy to let mortgage with a different lender.
Top tips to consider with your Buy to Let Mortgage:
- Consider your repayment options. It’s important to us that you understand the different methods of repaying your mortgage. A repayment mortgage would ensure the mortgage is repaid in full by the end of the term, however this would cost more on a monthly basis. In comparison, an interest only mortgage would be a cheaper monthly alternative, but you would only be paying off the interest. Ensuring you have a strategy to repay the interest only mortgage at the end of the term is key, this can be through the sale of the property, or lump sum payments.
- Ensure you have enough deposit to assist with the purchase of the property. Buy to let lenders typically require a high deposit. An advantage of a higher deposit is the access to more competitive products, making it more cost effective on a monthly basis.
- Assess your income and establish if it’s affordable for you should the property ever be vacant. It’s important to remember that the rental received on the property will help service the mortgage, however there can come a time where the property may be empty. Lenders will assess your income and the projected rental income to ensure you can keep up with your monthly payments.
- Buy to let mortgages are similar to residential mortgages in that they should be re-assessed at the end of a fixed rate or if interest rates rise. If you do not want your monthly payments to rise, which could result in less profit from your rent, it’s important to consider remortgage options or product transfer options.
- Are you a property owner already? It’s important to know that if you are a first time buyer and do not currently own a residential property, you are limited to providers who will offer you a buy to let mortgage. Some lenders will need you to own your own property before offering you a mortgage. Our advisor is here to help answer any questions you have.
- The type of property you are looking at purchasing as a buy to let is important too, some lenders do not lend on properties that are: high rise flats, holiday homes, flats above commercial premises etc. It is assessed on a case by case basis and our advisor will help identify any concerns.