Buy to let mortgages come in all shapes and sizes. Which type you should go for depends on all sorts of factors: your attitude to risk, your long-term investment goals (e.g.immediate income, future profit, etc.), how large a portfolio you have or aim to have, what type of properties you are interested in, etc.
• To start with, your level of risk tolerance will affect your choice of interest type – fixed or variable. A variable interest rate can be more risky as it is out of your control, and once your interest payments start to spiral it can wipe out your profits, or even threaten your ability to pay the mortgage. If you are a beginner, it’s a good idea to start off with a fixed rate, though even this is not completely risk free. If the mortgage rate drops below your fixed rate you are paying more than you need, while if it goes higher you may find it hard to budget for your payments when the deal ends.
• The two main types, fixed and variable rate, include other types such as capped rate, tracker mortgages, discount mortgages, stepped mortgages etc. Your broker will discuss with you whether any of these might be suitable for you. Discount rate mortgages can often seem tempting, but once the discount period is over you can actually find yourself paying a higher rate.
• If you are looking for an immediate cash flow from your buy to let mortgage, you will probably be attracted to an interest-only mortgage. This increases the chances of your rental income exceeding your outgoings. Of course, when the mortgage term ends you will have to repay the capital. You may be hoping to do this by selling the property at a profit, but in current market conditions this is far from being a certainty. If you have no clear idea as to how you are going to repay the capital, you might be better off with a long-term repayment mortgage – the longer the term, the lower the rates.
• Some lenders actually offer buy to let mortgages with a flexible rate. These can be hard to get hold of, but it’s worth shopping around and asking your broker. This way you could have the opportunity to take payment holidays when the property is empty. Of course the downside is that the overall rate is higher.
As well as there being different types of mortgage, different lenders impose different conditions for buy to let mortgages. In particular you need to check for the tie-in or lock-in period for each product – that is, how long they insist you remain with them before you can move without incurring a redemption penalty. You also need to check arrangement fees, which in some cases can cancel out the advantages of a low interest rate.
With all these variations in buy to let mortgages, you would be well advised to use a specialist broker when you are going for your mortgage. The broker can help you decide which type of mortgage to look for, based on your particular requirements, and will know which are the best lenders to approach for that particular type of mortgage. In fact some of the best buy to let mortgage deals are not generally advertised and the broker will be able to locate them for you. If you are just starting out as a buy to let investor, the last thing you want is to end up with the wrong type of mortgage – so make sure you have the best advice to make the right choice.