Buy to let loans are loans secured on properties that are being purchased for investment purposes, as opposed to residential. Before looking for buy to let loans, there are a number of things potential investors need to be aware of.
1. When deciding how much to lend you, the provider of a buy to let loan will look at the potential yield of the property, rather than at your own income. Because buy to let loans are seen as a higher risk, the lender will expect the achievable monthly rent to be at least 130% of the monthly mortgage repayment.
2. Although lenders will do their own investigations to work out the potential rental, it’s important that you don’t just leave this to the lender. You need to be satisfied yourself that the property is a good investment, before committing yourself to the loan. Once you have your buy to let loan it will need repaying whether the rent actually reaches the required amount or not.
3. Many people looking for buy to let loans have been influenced by big property companies who make a business of selling buy to let properties to first-time investors, on the basis of “guaranteed” rental incomes and/or resale values that turn out to be grossly exaggerated, or even false. In many cases the properties have been in large new-build blocks that have been developed especially for the buy to let market. The over-supply means that even if a tenant can be found at all, the rent will only be a fraction of what was expected. Of course the investor then can’t pay the mortgage and often can’t sell the property either – resulting in financial ruin. It is absolutely essential to do your own research into the market before applying for a buy to let loan. Don’t rely on promises from anyone else, however convincing they may seem.
4. Some people applying for buy to let loans are looking for a long-term investment, while others are more interested in rental income. Your main reason for going into the buy to let market will partly determine what type of loan you require. One possibility is to take out an interest-only loan with a view to repaying the capital by selling the property and profiting from the appreciation – but this is a high-risk strategy if you can’t be sure that the property will appreciate. Do your homework on the housing market as well as the rental market.
The idea of going into business as a landlord can seem very exciting and attractive, and it’s easy to get carried away. The people who succeed in this type of business are the ones who keep a cool head, do their research, and apply good business principles. Buy to let loans can help you make a lot of money if you use them right – but if you don’t, they can be a millstone round your neck.