Wednesday 15 February 2017

A few things you might not know about getting a buy to let mortgage

Author: Andrew Page

House keyring and keys

Since the mid 1990s, the buy to let industry in the UK has been growing at record pace. More and more individuals are purchasing properties to let out, cashing in on the capital growth of their investment as well as regular rental income from their property. For most investors, the first step in becoming a landlord is obtaining a buy to let mortgage for their property purchase. If you’re planning on making this step, here are a few things you should know about getting a buy to let mortgage.

Buy to let mortgages can cost more

In general, buy to let mortgages have higher rates of interest than residential mortgages, and furthermore, the fees charged by lenders to arrange buy to let mortgages can also be significantly higher. Banks will often charge you hundreds of pounds for a survey and could charge you up to £2,000 just to arrange the loan. You’ll need to factor these costs in when calculating your finances to ensure you have enough cash to complete the purchase. In some cases the arrangement fee of the lender can be added to the loan but doing that then does mean the fee accrues interest as well.

You will need to choose between interest-only and repayment mortgage types

There are two ways that you can repay a buy to let mortgage loan. With interest only mortgages, you won’t need to be paying off the mortgage each month; you pay the monthly interest and repay the capital in full at the end of the mortgage term. Repayment mortgages inevitably cost more, as each month you will be paying back a portion of the amount borrowed, in addition to the monthly interest. This type of mortgage is structured so that at the end of the term the capital borrowed and interest will have been paid for in full. If you have a payment you are happy to pay which is between the two then you can opt to split the mortgage so some of the balance is on each option.  Some interest only borrowers will instead opt for a mortgage that allows overpayments instead as a means to reduce the debt.

You’ll need a minimum 25% deposit

Virtually all lenders will ask you to have a deposit of at least 25% before they’ll consider offering you a buy to let mortgage. This is considerably more than the minimum of 5% required for a residential mortgage, and is something that’s essential for almost all buy to let purchases.

The amount you can borrow will depend on your potential rental income

Unlike residential mortgages, which are calculated according to your earnings, buy to let mortgages use the potential rental income of your property to estimate your loan value.  The amount a lender will be willing to offer depends upon the amount of rent that’s likely to be chargeable on the property. If you’re not sure how much your chosen property could achieve in rental income, talk to some local agents, or go online to get an idea of what you can hope to achieve. As rental calculations have become tighter a small number of lenders will consider disposable income to help support the mortgage above the rent figure.  There are not many doing this so far though so would limit the choice of lender if you wish to pursue that route.

Who can get a buy to let mortgage?

There are quite strict lending criteria when it comes to getting a buy to let mortgage. In general, you’ll need to own another property in the UK, have a good credit rating, earn more than £25,000 and be under 70 years old. If you tick all of these boxes, you should be able to secure a buy to let loan.

To learn more about applying for buy to let mortgages, or to arrange a loan of your own, contact a member of our team today.

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Written by: Andrew Page