How Buy to Let Mortgages Work
The most noticeable difference with a Buy to Let mortgage is that the loan provider (or lender) assess the potential rent as the primary source of income, unlike a typical mortgage where it’s assessed against your salary and earnings.
We discuss the key points of how Buy to Let Mortgages work:
What’s the criteria for Buy to Let mortgages?
A mortgage lender will apply a rent to interest (RTI) calculation to check that you can obtain enough rental income from the property to cover the interest on the mortgage. The RTI amount will vary, depending on the lender, but the rental income is typically between 125% and 130% of the monthly mortgage repayment.
It’s worth noting that some lenders some lenders will require a minimum annual income of around 25K in addition to the RTI.
As expected, you will have to put down a deposit, like on any mortgage. Buy to Let mortgages are available up to about 85% loan to value (LTV), meaning you will need at least a 15% deposit. It’s no surprise that lenders prefer larger deposits and those of you with 25% deposits are more likely to be successful.
Securing your Buy to Let mortgage
Sometimes, before a lender allows you to borrow any money, they will need to secure an existing property or asset against your new buy-to-let loan. To qualify further, you must commit to the intention of letting out the property to tenants, although you don’t need tenants in place beforehand. Just like a regular mortgage, you will re-pay the loan over an agreed period.
However, as a landlord, if you are unable to secure a tenant and the property is left unoccupied you may not be able to keep up with the mortgage repayments, resulting in the property being repossessed.
Repayment or interest only Buy to Let mortgages?
The answer to this query depends entirely on an individual’s strategy.
The majority of Buy to Let mortgages are interest only, resulting in lower monthly payments and tax efficiency, but the debt is not being paid off. This suits the likes of professional landlords and property investors, for two key reasons. Firstly, with the interest only route, the aim is to continue to grow a portfolio of property. Seen as a more long-term strategy, this route enables the investor to have a greater cash flow available in the capital of their property to allow further investment. At the end of the mortgage term, the investor could sell the property as a way of recouping the initial costs. Secondly, there are tax advantages. It’s best to seek a qualified accountant for further advice on the tax incentives available for Buy to Let mortgages.
In comparison, the repayment route is more suited to those looking to invest in property as an alternative pension plan. With monthly capital and interest repayments, the investor can rest assured that at the end of the mortgage term the full debt is repaid.
Risk and Reward
If managed correctly and professionally, investing in property, with a view to letting it out, can be a great way of generating extra income. In the same breath, it can be quite risky.
A period of time with no tenants is an obvious concern, when it comes to making repayments. However, there are also areas such as repairs and maintenance on a property to consider, as well as the constant fluctuation of the housing market. These factors could eat away at any potential profit margins.
Benefits of a Broker
If you’re looking for a Buy to Let mortgage, using a mortgage broker like MortgageKey opens up more options than going directly to a bank.
The fact that we are fully independent makes us unbiased. We can offer a comprehensive range of mortgage deals by accessing all corners of the market and use our relationships with lenders to secure a deal that suits you and your individual circumstances.