Buy to Let Mortgages
Buy to let mortgages differ from residential mortgages, in that you plan on buying a property that you intend to rent out, rather than live in yourself.
There are further differences between the products available to you too:
- The interest rates can be higher
- You typically need a higher deposit
Also, lenders can view a buy to let mortgage as being higher risk as the mortgage repayments might be dependent on a tenant’s ability to pay the rent, or there could be instances where the house is empty.
Despite the differences, being a private landlord can allow people to reap some significant benefits over time.
Establish your objective
When buying a second property, you need to consider whether your primary objective is income or capital growth. For example, are you looking to make a profit month on month, or are you looking to make a profit through increased equity from the second property if it increases in value over time. The decision may affect the type of property you purchase and the location.
There are also many costs involved when it comes to buy to let properties in addition to the monthly mortgage repayments.
Buy to let mortgages rates
The rate of your buy to let mortgage is dependent on your loan to value ratio and the rent you expect to receive. Your rate is also determined by the type of buy to let mortgage you choose:
Fixed Rate Mortgage
A fixed-rate mortgage is where you pay the same mortgage payment, at the same rate, usually for a period of 2-5 years. Even if the interest rates change with the lender or through the Bank of England, your rate remains the same for the duration of the deal.
When the deal ends, you’ll want to look for a new deal as you’ll be put on the lender’s standard variable rate (SVR) which is often a higher rate.
Tracker mortgages quite literally ‘track’ the Bank of England base rate month on month when determining your own interest rate. Should the BofE rate increase, so will your mortgage interest rate – the same should it decrease.
For example, assuming the BofE base rate is at 0.75%, the lender may apply an additional rate of 1.25% – which means your mortgage interest rate is 2%. Should the BofE base rate increase to 1%, the lender will still have their additional rate added on, so your mortgage interest rate will be 2.25%.
Things to consider with buy to let mortgages
There are three main differences in buy to let mortgages:
- Rent potential – the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases, your income is not ever considered.
- Interest rate – buy to let mortgages have slightly higher interest rates.
- Larger deposit – typically, a minimum of 20% or 25% of the property’s value is required as a deposit.
It’s also important to make sure you factor in the additional costs of owning and maintaining a rental property.
- Property upkeep – maintenance costs for the property.
- Letting agent’s fees – letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
- Ground rent/service charges – applicable to leasehold properties.
- Legal insurance – to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
- Insurance – building insurance and contents insurance for the items provided as part of the rental agreement.
- Furnishings – the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
- Gas/electrical appliances – cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
- Decorating costs – the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
It’s often best to speak with a mortgage advisor to find the right deal for you. At At The Mortgage Consultancy, we work with over 65 lenders to find you the right mortgage.