Buy to let mortgages have come into being over the last decade, as a result of the increase in demand. Previously, lenders were reluctant to provide finance on a property that was being purchased specifically for the purpose of renting out. However, more and more people were seeing this type of investment as an –apparently safer – alternative to the stock market. So an increasing number of lenders realised it was in their interests to cater to this sector of the market.
Because this is a unique type of mortgage most people need to have buy to let mortgages explained before taking the plunge. The main characteristic is that, since lending on a rental property is seen by providers as higher risk, most if not all of them impose more stringent conditions than on a normal residential mortgage. In fact, a buy to let mortgage is different from other mortgages in quite a number of ways.
These differences include:
• Since lenders see the loan as higher risk, they require a larger deposit. Most require at least 15% and some require a 20% deposit. Of course, the higher deposit you pay, the lower your repayments will be, and you may well be able to raise the deposit by using equity release on your main residence.
• The decision as to whether to lend to you or not will be based wholly or partly on the rental potential of the property, rather than on your own financial circumstances as with a residential mortgage. Most lenders will require the likely monthly rent to amount to at least 130% of the monthly mortgage repayment – some will require it to be up to 150%. Some in addition want to see an annual yield of at least 8% of the mortgage amount.
• The interest rate on a buy to let mortgage is generally higher than on a residential mortgage. However it is often possible to find competitive deals if you hunt for them, or use a good specialist mortgage broker.
• An important difference is that the interest payments on a buy to let mortgage attract tax relief. You do have to pay tax on your rental income, but you can set your interest payments against it, as well as other expenses such as maintenance, letting agents’ fees, buildings insurance etc.
• Another important point you must bear in mind is that buy to let mortgages are not regulated by the Financial Services Authority in the way that other types of mortgage are. This means you have less protection if things go wrong. It is really important that you do your homework, do your research and exercise caution before committing yourself to a buy to let mortgage.
Buy to let mortgages are a very specialised type of mortgage designed for a specific market. However, once you are clear about the differences between these mortgages and standard mortgages, you shouldn’t have any problem. If you need buy to let mortgages explained in more detail, the best thing to do would be to talk to a buy to let mortgage broker. Plenty of people are enjoying being landlords and you can soon be one of them!