Buy To Let Mortgages
This type of mortgage allows you to let out residential or commercial property and take the rent as income. Some investors stick with one rental property while others expand their portfolio and even become full-time property investors. This lucrative investment type is by no means simple, but it can put you on the path to lifelong financial security.
Buy to let mortgages can be more complicated and harder to secure than residential mortgages. There’s no need for this to put you off though. With the right information, you can make a buy to let mortgage work for you.
The saying ‘safe as houses’ might not be as strong as it was during previous generations but there’s no mistaking it, property is still one of the best investments you can make.
If you want to know what the current buy to let mortgage landscape is like in and how you can secure one, keep reading.
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What Are Buy To Let Mortgages?
A buy to let mortgage is a type of commercial mortgage for a property that you will not be living in. It is called a commercial mortgage even if it’s over a residential property, so long as you are not the resident. This is because the property is a commercial endeavour to you, the mortgagor.
Buy to let mortgages are for any property you intend to let out including residential and commercial property such as shops or industrial units.
If you intend on living in the property first and may let it out in the future, you will most likely need a traditional residential mortgage instead. However, you will have to let your mortgage lender know if you want to rent your property and they may not allow the change of use.
Individuals or limited liability companies can take out buy to let mortgages.
How Do Buy To Let Mortgages Differ From Traditional Mortgages?
There are several important differences between traditional mortgages and buy to let. As even tiny differences can add up over the years, it’s crucial you pay attention to the smallest of details.
The majority of landlords opt for an interest-only mortgage which is the opposite of a typical residential mortgage. With a residential mortgage, your aim as a homeowner is to pay back the cost of your house over the mortgage terms.
With a buy to let mortgage, many landlords will use the rental income to pay the interest and look at selling the house in the distant future at a profit. Buy to let properties are long-term investments and work well if held for a considerable amount of time as you won’t be paying off the capital amount.
Interest rates are low at the moment but buy to let interests rates are usually higher than those for residential mortgages. This is because lenders see rental income as riskier than mortgage repayments from owner-occupiers. If you think about it, this is understandable.
A tenant can move out more or less whenever they choose. This could leave the property unoccupied and the owner struggling to re-let it, losing the income. In contrast, if an owner is residing in the property, they have a vested interest at keeping a roof over their head.
Rental Income Contingent
The lender calculates traditional mortgages by the amount they think you can afford but a buy to let mortgage is usually calculated based on rental income.
Lenders want proof that the rent you’ll receive will more than cover the mortgage repayments each month as well as maintenance costs on the property. Most lenders will also require you to have personal income in addition.
You can sometimes get a residential mortgage with as little as a 5% deposit but it’s not the same story for buy to let.
For a buy to let mortgage, the bigger the deposit the better, with many lenders requiring at least a 25% deposit. Again, this is because this type of mortgage is riskier than a traditional mortgage.
Types of Buy To Let Mortgage
Just as with residential mortgages, there are different types of buy to let mortgages. To find the one that suits you, you’ll need to be aware of the risks and find out the differences in cost.
A fixed-rate mortgage is an introductory rate at a lower percentage than the lender’s standard variable rate. Fixed-rate mortgages will change depending on the economic climate and carry some risk. As they tie you into a set rate for a defined period (often two to ten years), if the rates fall, you’ll be stuck paying above average.
Discounted Variable Mortgages
A discounted variable mortgage is one at a discount to the lender’s standard variable mortgage rate. This discount lasts a set amount of time, normally two to three years. After this, they revert to the lender’s standard variable rate which may not be the best deal.
A tracker mortgage is one that is tied to the Bank of England’s base rate. Your lender will set your interest rate a specific percentage above the base rate and it will go up and down as the base rate does.
However, if the interest rates rise, you’ll still be paying the same and be in a better position. After the fixed term is complete, your rate will default to the lender’s standard variable rate. This may not be the best deal out there and remortgaging could be beneficial.
Is It Easy to Get a Buy To Let Mortgage?
The ease at which you can secure a buy to let mortgage is very much dependent on your personal situation. Lenders want to give mortgages to the least risky borrowers so the more you can prove you can make your payments, the better chance you’ll have.
If you’re looking to get a buy to let mortgage for the first time, you’ll most probably have to already own your own home and have an excellent record of repaying your mortgage. Some lenders will consider first time buyers if you meet other criteria and can prove significant savings to cover rental income issues.
Having a large deposit will also make you a more attractive borrower for lenders. A large deposit will give you access to the best interest rates which will help you maximise your profits too. The minimum deposit generally accepted is 25% but for the best interest rates, a deposit of 40% would stand you in better stead.
The buy to let mortgage industry responds to the economy so using a professional commercial mortgage broker is the best way to get up-to-date advice on your buy to let mortgage application. As they differ from traditional mortgages, a broker can steer you past offers that will cost you dearly and find you the best possible mortgages for your circumstances.
How Long Does It Take to Get a Buy To Let Mortgage?
The process of getting a buy to let mortgage takes a different amount of time depending on the factors involved. With a skilled broker, you should be able to receive an offer in under six weeks although delays can happen. Completion can often happen within a month after the offer.
The key to getting a buy to let mortgage in a short time frame is to complete the relevant paperwork accurately and ensure you have a good financial record behind you. Your broker will let you know the documentation and evidence you’ll need for your application and what you may need later down the line.
Having your documentation and financial proof in order when you apply can save time later when asked for evidence.
If you’re remortgaging, it can take much less time. For instance, you intend on renting out your previous home and your lender won’t allow it on the same mortgage. When remortgaging, it’s important to shop around to get the best deal. While this may delay things, you could end up in a better financial position.
April 2020 Buy To Let Mortgage Changes
From the 2017-2018 tax year, the government brought in changes to how they tax landlords’ income. These changes affect individual landlords and those in a partnership or letting through a trust. It doesn’t affect companies or landlords of furnished holiday lettings.
The changes mean landlords have to pay tax on their turnover. Before 2017, landlords only paid tax on their profits. These changes come into full effect from 6 April 2020.
Depending on your personal situation and income, this new taxation change may be worth considering in depth before you commit to becoming a landlord.
As landlords must pay tax on turnover, you won’t be able to offset your mortgage interest against your rental income. This change will affect higher-earning landlords more than lower-income landlords as a 20% tax credit will be available. The change may push higher-earning landlords into the 40% tax band, impacting their earnings without their income actually increasing.
You should also note that these changes apply to residential landlords only and not landlords of commercial property.
Don’t Let the Complexities of Buy To Let Mortgages Put You off Investing
The housing market isn’t as stable as it once was and the consequences of Brexit are still unfolding but investing in property can still be a strong step. Buy to let mortgages aren’t the same as residential but that doesn’t mean they’re out of reach for many would-be landlords.
When you’re looking into getting a buy to let mortgage, it’s important to note that they require larger deposits and have higher interest rates than traditional mortgages. When you go into this type of investment with all the right information, you’ll be able to prepare and make it work for you.
If you want to know more about buy to let mortgages, get in touch with us today. Having a skilled broker means getting first-class guidance through this complex process and coming out the other side with the best possible deal.
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