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An explanation of Buy-to-Let mortgages

A landlord may decide to buy a property with the view to renting it out, for which they need a Buy-to-let mortgage. It is generally considered that mortgages for a buy-to-let property have similar rules to that of a normal property; however there are some key differences that investors need to be aware of before they invest in their property.

How is a buy-to-let mortgage different to a regular mortgage?

A buy-to-let mortgage is similar to an ordinary mortgage, but it is important to note that there are some key differences between the two:

  • Most buy-to-let mortgage lending is not regulated by the Financial Conduct Authority (FCA).
  • Any interest rates and fees involved in buy-to-let mortgages are typically higher.
  • The deposit for a buy-to-let property is often 25%, but can also be between 20% and 40%.
  • A large proportion of buy-to-let mortgages are interest-only, meaning that you don’t pay monthly, but do have to repay in full at the end of the mortgage term.

Where can you get a buy-to-let mortgage?

Buy-to-let mortgages are offered by most big banks and specialist lenders, but it is essential that you choose wisely to ensure that you get the best deal possible. The best way to find the most suitable solution for you is to use comparison sites and maybe even a mortgage broker. The comparison sites, such as Money Saving Expert and MoneySuperMarket, are a great way to find the most suitable deal for you because they allow you to find a mortgage based on your specific needs and preferences. However, it is important to remember that different sites will give you different search results, so using more than one comparison website will give you a higher chance of finding the best deal.

Who can get a buy-to-let mortgage?

There are many factors that banks and lenders take into consideration each time somebody would like to apply for a mortgage for a buy-to-let property. Although some factors are more important than others, generally you will be successful if:

  • You are in a position to take a risk, as all investment properties have an element of risk associated with them.
  • Your credit score is good and your other financial commitments, such as your personal home mortgage and credit cards, won’t affect your payments.
  • You already own your own home, no matter whether you have an outstanding mortgage or if it is fully paid off already.
  • The property you are looking to invest in is either houses or flats.
  • Your annual income is £25,000 or more, as your potential lender may be reluctant to give you a buy-to-let mortgage.
  • You’re under a certain age, as mortgage lenders may refuse to approve mortgages to anybody over their maximum age limits.

How much can you borrow for a buy-to-let mortgage?

The amount that you will be able to borrow from your lender is based on the expectations for the rent that you will receive. A lender would usually request that the rental income be 25-30% higher than the mortgage payment. An easy way to calculate how much you could borrow would be to find out the rental income for similar properties in your area, by talking to letting agents, checking in the local press or looking online.

Helpful tips

It is important to ensure that you plan for periods of time where there may not be any income due to having no tenants. If you assume that there will always be tenants in your property, you may not have any financial backup should you need it for your mortgage payments. Having some extra financial support, such as savings, would mean that you are also able to cover any costs for repair bills.

If the time comes that you sell your buy-to-let property, and you sell it for a profit, you will need to pay Capital Gains Tax if it exceeds the threshold. If the rental income that you receive exceeds your mortgage interest payments and other allowable expenses, it may be liable to Income Tax.

If you find that you are unable to meet payments, it is essential that you don’t just assume that you can sell the property to repay the mortgage. The fluctuations in house prices could mean that the sale price of your house may not cover the mortgage, which would then leave you with a fee still left to pay.

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