Buy to let mortgages in the UK allow you to borrow money to buy properties to rent out.
Getting a mortgage buy to let enables landlords to 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.
Buy to let mortgages explained
Buy to let mortgages tend to be on an interest-only basis, which means that repayments will not go towards repaying the loan. At the end of the 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 landlords 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.
Getting a buy to let mortgage
Unlike a standard mortgage, with a buy to let 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 are available as fixed, variable and tracker deals and arrangement fees are normally around 1.5% to 2% of the mortgage.
However, to get a buy to let mortgage you will need a larger deposit 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.
Nine top tips for buy to let mortgages
While a buy to let mortgage can be a great investment we’ve pulled together nine things you should consider before you choose to become a landlord:
Think about the rental market
Don’t just buy a property that you like, buy a property that the kind of tenant you want to attract will actually want to rent. Are you looking for students for instance, or young families?
Consider any legislation that the government is planning to introduce that may help or hinder your property’s attractiveness to potential tenants.
Buy to let mortgages are risky so make sure you’ve done your sums and you know what you’re letting yourself in for.
Count on the property being vacant for a few months for instance, and unexpected costs like having to call the boiler man more frequently as wear-and-tear takes its toll.
You will also have to pay tax on your income and agency fees to advertise and manage the property.
Research the market to get an idea of how much demand there is for renting in the area you’re buying in.
Location, location, location
The old property cliché. 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 and income tax, 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 account of how much of your time it will occupy into consideration. Maintenance, viewings, posting ads, and collecting payments 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.
A mortgage buy to let probably isn’t a good short-term investment as 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.
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- First Time Buyer Guide - If you’re looking for your first home the mortgage market can be daunting