Buy-to-Let Mortgages

Property is a relatively safe investment and that isn’t expected to change anytime soon. With interest rates at an all time low, returns on savings aren’t much to write home about. If you want your money to work harder for you, rental properties could be the opportunity you’re looking for.

If you need to raise capital for a rental property, you’ll need a buy-to-let mortgage. But what is a buy-to-let mortgage and how do they work?

What is a buy-to-let mortgage?

A buy-to-let mortgage is designed specifically for those wanting to buy property to rent out. Whether it’s an individual wanting to boost their income or provide a pension for the future or a large scale commercial landlord, the product is the same.

If you are planning to purchase a property with the sole purpose of renting it out to generate income then a buy-to-let mortgage is what you need.

What’s the lending criteria for a buy-to-let mortgage?

Different lenders have different criteria but most will look at the rental income of the property. There are, of course, many other particulars when it comes to securing a buy-to-let mortgage. Integrity Mortgages have extensive experience with buy-to-let mortgages and can help you secure the most suitable mortgage for your rental property.

For professional help with any aspect of buy-to-let mortgages, contact our team.

How are buy-to-let mortgage applications assessed?

If you have had a standard mortgage before, you will know that they are assessed on your income and affordability.

Buy-to-let mortgages are different. Applications are based on the viability of the rental property you’re trying to mortgage. The higher the rental potential, the higher the chance of qualifying for the mortgage.

As property rentals can result in sporadic income and periods of low occupancy, property rentals are classed as a higher risk by lenders. That results in a requirement for a higher deposit of at least 25% of the value of the property.

Buy-to-let mortgages are predominantly interest-only mortgages. You pay only the interest over the term and pay off the principal with another mortgage or by selling the property.

How do buy-to-let mortgages work?

The application process is largely the same as standard residential mortgages, only affordability is assessed on the potential income of the property rather than your own.

Many buy-to-let mortgages are interest-only but you can access capital repayment mortgages if you wish. We recommend fully exploring your options to select the best option for your circumstances.

You will require a minimum of 25% deposit and will need a business case with potential rental income and anything else you have to support your application.

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

The amount you can borrow depends on how much rental income the property is likely to generate. Typically, lenders like to see rental income of 20-30% above the cost of the mortgage but there is no firm rule.

It’s advisable to consult a letting agent to get an accurate picture of potential rental income on the property before applying for the mortgage. Then you can present their findings to the mortgage company to help support your application.

You will also need to have the deposit necessary to qualify for the mortgage.

For professional help with any aspect of buy-to-let mortgages, contact our team.

Buy-to-let mortgage types

Expect to pay a higher rate of interest on a buy-to-let mortgage because it’s perceived as higher risk. Rates will obviously vary depending on the prevailing rates at the time.

You typically have three main buy-to-let mortgage types:

• Fixed rate buy-to-let mortgage – A fixed interest rate over a set period covering several years. There are various fixed terms on offer but the longer the fixed term, the higher the interest rate.
• Discount variable buy-to-let mortgage – This uses the lender’s standard variable interest rate and applies a discount. As the standard rate fluctuates, so does your own rate.
• Tracker buy-to-let mortgage – This product tracks the Bank of England’s base interest rate and adds a percentage. As the BOE rate changes, so does your own rate.

There is no ‘best’ option here. Only what’s best for your particular situation.

Fixed rate buy-to-let mortgages are useful if you prefer the predictability of knowing exactly how much is going out each month. The downside is that if rates fall, you won’t benefit from them.

Variable-rate buy-to-let mortgages are more flexible and will fall as interest rates fall. They will also rise when interest rates rise.

Advantages of buy-to-let mortgages

There are three primary advantages of investing in property instead of other types of investment.

They are:

• Higher returns – While savings interest rates are low, so are the advantages of having savings. Property can provide higher returns but comes with higher risk.
• High demand – The UK has a buoyant rental market where demand always outstrips supply. There is nothing to say it will always be like this but it will remain so for the foreseeable future.
• Tax benefits – As buy-to-let is a business, you can offset costs in tax. You can claim mortgage interest, repair costs, running costs and council tax back when tax time comes.

Minimising the risks of buy-to-let mortgages

All borrowing involves risk. How much risk each debt involves depends on your personal circumstances but there are practical ways you can minimise your exposure.

• Know your rental market – Selecting a property that suits the prevailing rental market at its location will help minimise vacant periods.
• Saving profit to reinvest – Saving a portion of any profit to help with repairs, maintenance and to cover mortgage payments when the property is vacant is an essential part of running a profitable business.
• Keep the property in good condition – Higher quality properties attract higher quality tenants willing to pay higher rents for longer periods. Give the market what it wants and you should keep vacancies to a minimum.
• Work with a reliable letting agency – You can manage your own rentals if you prefer but using a lettings agent does offer advantages that can offset their fees. That’s especially true if you’re busy with family or a career and won’t be able to dedicate the time and resources to your rental property.

If you’re considering a buy-to-let mortgage, it pays to work with the experts. Contact Integrity Mortgages today to see what we can do for you.

Important Information

You should be aware that the Financial Conduct Authority does not regulate some forms of buy to let mortgages.

Your property may be repossessed if you do not keep up repayments on your mortgage.

About us

Integrity Mortgages Limited trading as Integrity Mortgages is an appointed representative of HL Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. You should be aware that the Financial Conduct Authority does not regulate some forms of Buy to Let mortgages.

A fee is payable for arranging the mortgage once your mortgage has agreed. This will be a fixed fee of £399.

The guidance and / or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK.

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