Buying a property to let out can be a great way to boost your income and invest for the future – despite the new fee and licensing regulations that have been introduced over the past few years, it’s still hugely popular in the UK. In fact, one in 10 property owners have shown an interest in taking out a buy-to-let mortgage.
Although they share similarities with standard residential mortgages, there are some key differences. They are seen as higher risk than residential mortgages, as landlords may face issues with rent collection, and it’s unlikely that the property will always be occupied.
As a result of this, the deposit for a buy-to-let mortgage is significantly higher – typically at least 25 per cent of the overall value of the property, although this can vary. The majority of buy-to-let details are interest only, meaning that, as a landlord, you’ll only be paying monthly interest repayments rather than payments on the loan itself, meaning the monthly costs are lower. However, after the end of the term, the mortgage must be repaid in full – most landlords do this selling the property.
As buy-to-let landlords can’t guarantee that tenants will always pay rent on time, or that the property will always be occupied, it’s important to make sure you have the money available to cover these situations. You may also be liable to cover standing charges on council tax, insurance and utility bills, so be aware of that if you’re thinking about taking on a buy-to-let mortgage.
The amount that you can borrow depends on how much rent you can expect, realistically, to get from your property each month. Generally, lenders will need a ‘buffer’ of 125 per cent of your interest payments each month, but it can be higher. If you need the rental value of the property to be 125 per cent of your interest repayments, you would need to charge tenants a minimum of £875 if your interest payments are £750, for example.
The lender will need verification of the property’s rental value from a surveyor, but you can get a good estimate of how much rent you’ll be able to charge by doing some research into similar properties around the same area. Just like standard residential mortgages, buy-to-let mortgages have a loan-to-value (LTV) ratio, which is the amount that you need to borrow, divided by the value of the property and multiplied by 100.
It’s a bit trickier to apply for a buy-to-let mortgage than a residential mortgage, as there are certain criteria you’ll need to meet to be eligible one – it can be a complicated process, so give one of our helpful advisers a call on 0330 088 1494.