Buy-to-let mortgages allow you to borrow money to buy properties to rent out. Although the buy-to-let mortgage market has shrunk over recent years, they are still available and can be a good investment.
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What are buy-to-let mortgages?
Buy-to-let mortgages let landlords borrow money specifically to buy a property for the purpose of renting it out.
They work just like a normal mortgage, but lenders take the potential rental income into account when deciding how much money they are happy to lend.
How do buy-to-let mortgages work?
Unlike a standard mortgage, with a buy-to-let-mortgage, lenders take your income into account as well as a percentage of the rental income you will get from letting the property.
Buy-to-let mortgages tend to be on an interest-only basis, which means that repayments will not go towards repaying the loan and at the end of the buy-to-let mortgage, it is the cash from the sale of the property that covers the outstanding amount.
Most other mortgages will tend to be on a capital repayment basis, which means you pay back a part of the loan and the interest each month. But with many buy-to-let mortgages, you only pay the interest on the loan, with the income you receive from the rent yours to keep although many consumers put this into a savings account to help pay back the mortgage at the end of the term.
Other buy-to-let homeowners will use the sale of their property to pay back the mortgage, especially if its value has increased over that period.
Buy-to-let mortgages are available as fixed, discounted and tracker deals and arrangement fees are normally around 1.5% to 2% of the mortgage.
You will need a larger deposit for a buy-to-let mortgage than a standard mortgage, due to the higher risk involved.
The risk for the bank is that your tenant may stop paying rent, or you may struggle to find someone to rent the property. Unlike a standard mortgage, a buy-to-let mortgage relies on a third-party to provide you with the money to pay it off.
Has the global economic crisis had an impact on buy-to-let mortgages?
Yes. As a result of the global credit crisis there is less money available for borrowers and there are fewer buy-to-let mortgages on offer.
Interest rates are higher, larger deposits are required and lending criteria have been tightened up. However, during a crisis interest rates tend to remain low to encourage the banks to lend and get the economy moving. On the other hand, by the same token, your savings are unlikely to grow if you’re retaining the rent income to pay off the entire mortgage later in an interest-only repayment deal.
Read on for our nine tips to help keep your buy to let mortgage rates down.
Nine top tips for buy-to-let mortgages
- Be careful - buy-to-let mortgages are risky; make sure you’ve done your sums and you know what you’re letting yourself in for. Research the market to get an idea of how much demand there is for renting in the area you’re buying in.
- Think about the rental market – don’t buy a property that you like, buy a property that the kind of tenant you want to attract will actually want to rent. Consider any legislation that the government is planning to introduce that may help or hinder your property’s attractiveness to potential tenants.
- Location, location, location – the old property cliche. However, choosing the right location will make or break a buy-to-let deal. Do your research and find out what the rental market’s really like in the area you’re looking at. An area with valuable properties may not be the best for you if people are unwilling to pay the rent associated with it, so weigh in a range of factors.
- Account for maintenance – you need to make sure you can cover all the costs of maintaining the property. Buying somewhere run-down or with a big garden will increase those maintenance costs. A modern build may have less maintenance but the list price can sometimes be inflated, so consider what tenants are likely to be willing to pay to rent your property versus the day-to-day cost of running the property.
- Remember the tax – remember you will have to pay tax on gains in the value of the property when you sell it, but expenses like agent fees and interest costs can be offset against rental income.
- Don’t forget letting agent fees – if you use an agent, they will charge 15-20% of the rental income to manage your rental properties. This could make managing the property easier and leave the day-to-day dealings with your tenant to them, but decide whether the costs outweigh the potential disadvantages of doing it all yourself.
- Time is money – if you’re not going to use a letting agent, take a look at how much of your time it will occupy into consideration. Maintenance, viewings, posting ads, collecting payments etc all take time. It could also make finding the right tenant a little harder, which could cause you problems down the line if they have trouble paying the rent on time or maintain the property well enough.
- Think long-term – buy-to-let probably isn’t a good short-term investment, you may have to be patient and wait a number of years before you start to see returns. Putting down a higher deposit could earn you lower mortgage rates, but either way, the returns won’t be coming in very quickly. Decide whether you can afford to be without a large sum of money for a long period and then consider how much and how long.
- Shop around for a mortgage – the mortgage interest rate you get is vital. Shop around, get plenty of quotes and make sure you’re getting a competitive rate. When you compare mortgages consider the length of the fixed rate you’ll be getting and the cost of arranging the mortgage, as well as your monthly repayments versus the overall amount you’ll be paying.