If you are thinking of becoming a landlord, then you may also be considering a buy to let (BTL) mortgage. A specific BTL mortgage is usually needed to rent out a property as this is typically not permitted with a conventional mortgage.
Owning an investment property can reap considerable financial rewards over time including producing an ongoing income stream and delivering a longer-term capital gain. A rental property can be seen as an attractive alternative to saving money in the bank, pension fund or shares, particularly when interest rates are low.
Recent data shows BTL mortgages remain very popular. In the 12 months to June 2019, 234,000 buy-to-let mortgage loans were taken out with a total value of over £36 billion. Of these,169,000 were re-mortgages and 65,000 were used for property purchases.
If considering a BTL mortgage, there are a number of differences to traditional mortgages (for primary home purchases) you should be aware of. These differences reflect the fact that lenders normally see BTL mortgages as being higher risk.
Some of the fundamental differences between traditional and BTL mortgages include:
- The decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases, your income is not considered.
- BTL mortgages generally have slightly higher interest rates.
- A larger deposit is typically required - a minimum of 20% or 25% of the property’s value. To get access to the better deals you might need upto 40%.
- Most BTL mortgages are interest-only. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full.
- BTL mortgages usually have higher arrangement fees than residential mortgages.
- Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA) because they are seen as business transactions.
The relationship between rent and mortgage interest is called the Interest Cover Ratio (ICRs) and most lenders will want to see a ratio of between 125% and 145% before they are willing to lend. For example, if you received rent of £1,000 per month, at a ICR of 125%, you could afford mortgage payments of £800.
Having an ICR of 125% or higher means that the rent received by the landlord should be sufficient to cover not only mortgage interest, but also the other ancillary costs of owning and renting property including agents’ fees, redecoration, ground rent and maintenance charges (for leaseholds) and void periods between rentals etc.
If you are thinking of making a property investment then please ask our team for further information and some practical steps to help you secure the best possible rental return and capital growth on your property.
If you are thinking about taking out a BTL mortgage or re-mortgaging an existing BTL property and you feel that you could benefit from a brokers involvement, then please contact our team to arrange a meeting with Assured Mortgages.