Buy to Let Mortgage Guide for Landlords and Property Investors

If you are a property investor or existing landlord considering purchasing a buy to let property it is more than likely that you will need a specialist type of property loan known as a buy-to-let mortgage. Buy to let mortgages are not the same as those mortgages designed for home-owners often referred to as residential or home owner mortgages. These two mortgage products are different in a number of ways and you should know how they differ.

What is a Buy to Let Mortgage?

Buy to let mortgages are designed specifically for property investors and landlords who buy residential property with the intention of renting it to tenants for commercial gain.

For this reason buy to let loans are often more expensive, the interest rates charged are usually higher and a larger initial deposit is often required by the lender.

Buy-to-let mortgages are only suitable for landlords and property investors and are usually only available to those who already have a mortgage and a significant cash amount to use as a deposit.

How do Buy to Let Mortgages Work?

Unlike the more traditional home owner mortgages, buy-to-let mortgages are not calculated based upon household income but upon how much rental income the property being mortgaged can be expected to command.

However, it is important to note that if an investor’s income is below £25,000 per annum, a buy to let mortgage will be much more difficult to acquire, if at all possible.

In addition to a lenders typical Loan-to-Value (LTV), the estimated gross yield for the property is also taken into account when a mortgage lender calculates how much an investor can borrow.

Mortgage lenders usually require that the rental income from the property is at least 125% of the mortgage repayments.

So for example, if the proposed monthly mortgage repayment on an investment property was £1000 per month then a typical buy to let mortgage lender would look for a minimum rental income of £1250 per month.

Some lenders also consider new-build property to present a higher risk and so require a higher percentage than the 125% if an investor is mortgaging a new-build property.

Bigger Mortgage Deposits

Mortgage lenders for buy-to-let properties usually expect a minimum deposit of 25% of the value of the property; any lower and the fees and interests rates are increased accordingly.

Established landlords and property investors will find it easier to secure a more desirable mortgage deal with a lower deposit requirement, however for new investors 25% is the typical minimum.

But to Let Mortgage Fees & Interest Rates

Buy to let investors should be aware that arrangement fees are generally higher than on residential mortgages and can range from anything between £700 to £3000… it is therefore important to factor this fee into your overall financial projections.

Buy to let mortgage rates are also usually higher than those for home owner residential mortgages.

Repayment Mortgages

There are three primary types of buy to let repayment mortgage, each having their own advantages and disadvantages:

Fixed Rate Mortgage
With fixed rate mortgages the interest rate is fixed for an agreed length of time, so even if interest rates decrease during that period your rate will remain the same.

This is beneficial when interest rates increase but can be frustrating in times of decreasing rates.

Fixed rates are usually two to three years for buy-to-let mortgages.

Be careful though, because after the agreed time the interest rates can be changed to a level that might not suit your financial situation.
Variable Rate Mortgages
A variable rate mortgage is when your mortgage rate changes when interest rates change.

Payments are adjusted based on published interest rate changes.

The disadvantage of this type of loan is that your interest rate may go up to a level that becomes unaffordable for you.

However, early repayments are generally free and lenders usually won’t charge for you to leave them for another provider.

Most fixed rate mortgages change to a variable rate mortgage after the agreed period.
Tracker Rate Mortgages
A tracker rate mortgage is a mortgage where the interest rate “tracks” the base rate or LIBOR (London Inter-Bank Offer Rate) rate at a certain level.

If either changes, your mortgage rate will change accordingly.

Both the variable rate and tracker rate can go either up or down so landlords and buy-to-let property investors need to make sure that their finances can accommodate such higher interest rates.

Interest Only Mortgages

An interest only mortgage is a mortgage were the borrower pays off only the interest on a mortgage and not the capital until the end of the mortgage term, usually 20 to 30 years, when a borrower is then expected to pay off the entirety of the loan.

Interest only mortgages are very popular with buy-to-let investors and landlords but they need to be aware of the risks and have a plan in place for repayment of the capital sum borrowed when the mortgage term ends.

Property Investor Risks

UK buy to let investors have in the last few years experienced increasing rental yields and low interest rates with many property investors reaping the benefits.

In addition, there has been some improvement made in the sector with the introduction of letting regulations that help to reduce fraud.

However, when taking out a buy-to-let mortgage, landlords and investors also need to consider the risks that are involved when the market isn’t running quite so prosperously.

Property investors should always make sure they have sufficient funds available to cover any void periods that a property might experience and that they have factored into their finances any building maintenance works that need to be carried out.

This is to ensure that mortgage repayments can always be met.

If a buy to let property investor has mortgaged a property using an interest only mortgage and is considering selling at the end of the term in order release any capital accumulation and also to repay the loan it is important to consider the implications of falling house prices which bring with it the possibility of negative equity.

It is important that when considering taking out a buy-to-let mortgage, a plan for every possibility is in place to safeguard your investment from turning into a debt, or even the possibility of it being repossessed by the lender.

Income Tax on Buy to Let Profits

When calculating forecasted profits, investors should always remember that any rental income gained after the mortgage payments and any specific allowable expenses, is likely to be taxable at the prevailing rate.

Where income tax is concerned we would always recommend that you seek the advice of a property tax specialist.

Specialist Buy to Let Property Investment & Finance Solutions

As a leading independent property investment specialists Investment Property Partners offer expert advice and support to clients across our specialist areas of expertise helping them to achieve their investment objectives.

If you are a new property investor or existing landlord looking for buy to let property investments please contact us today to discuss how Investment Property Partners can help you.