Buy To Let Mortgages
With a buy to let mortgage you will be buying a property with a view to renting it out rather than living in it. Some people do this for a living, building up a portfolio of houses and flats to gain both an immediate rental income and a longer term investment. Others may use this route to invest a lump sum or to build up funds for later life by simply buying one property.
Are Buy to Let Mortgages Different to Regular Loans?
There isn’t any difference in the way these loans work compared to ones you’ll take out to buy your own home. For example, you’ll put down a deposit and then borrow the rest of the property price. You can choose from repayment and, sometimes, interest only options and you can use a variety of deals such as fixed rate and trackers. You can buy alone, with someone else or even in a group of people. But, there are some other differences.
Fees, for example, can work differently. Although some lenders will charge a flat rate fee as usual, many prefer to base their fee on a percentage of the property’s value. This can significantly increase your costs compared to what you would pay for a regular residential loan. Those that charge flat fees may set higher limits than usual unless you are lucky enough to find a special deal. Interest rates also tend to be higher here.
If you are approved for lending then you may be given broader options than with a regular mortgage. A lender may, for example, give you the flexibility to take out more than one deal to buy multiple properties. This can be set to either a specific number or to a maximum money limit. You’ll also find that the criteria used to assess and approve this kind of borrowing can be slightly different.
How do Lenders Approve Buy to Let Mortgages?
The way that you are assessed here is not exactly the same as when you bought the home in which you live. Affordability is, of course, vital and some lenders will ask you to meet their general rules as well as some additional ones. But, the fact that your new property will be rented out and will therefore technically pay its own costs can change the application criteria a little and move the emphasis away from how much you earn to how much your house/flat will earn. Lenders are likely to ask that you:
- Are over a certain age (i.e. 25 years old) and, in some cases, are under a certain age (i.e. 75).
- Earn over a set amount of money a year.
- Contribute a specific percentage as your deposit (this is usually higher than regular LTVs and may average out at around 40% although some lower deals can be found).
- Can show that your rental income is likely to exceed your mortgage repayment (this is usually checked by the lender during the valuation process). This can be based on an interest or repayment basis. So, for example, you may be expected to bring in rent at a level of 125% of your monthly repayment to qualify. If you snag a low rate deal for a couple of years then this rate may not be used as the percentage measure in some cases – some lenders will base their calculations on their own SVRs to be on the safe side.
- Are buying a type of property that they consider to be a good investment – some lenders, for example, won’t approve buy to let deals for certain types of flats.
- Commit to using specific types of rental agreements (such as assured shorthold tenancies etc).
Each lender can use different criteria and different rules so it is worth looking around and comparing what you’ll need to offer and what you’ll get before you apply. Some, for example, will insist on an LTV of 60%; others will be a little more flexible. Some will allow you to borrow based solely on potential rental income; others will look at your overall income affordability as well. These loans can work out to be a good investment as they can provide immediate income and long-term returns but, as with any mortgage, it is important to think about the pros and cons before you commit.
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