We know how important it is for you to have an idea of the some of the best mortgage rates that may be available to you.
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Whether you are looking to expand an existing rental property portfolio, or are thinking of becoming a landlord for the first time, you will need to take out a buy-to-let mortgage rather than a standard residential mortgage. As the name suggests, a buy to let mortgage is a special type of mortgage which is specifically designed for people who are buying a property to rent out to a tenant or tenants.
While both buy to let mortgages and residential mortgages involve you borrowing to fund a property purchase, there are some important differences. Rates on buy to let mortgages are usually higher than on residential mortgages, and you will need to put down a bigger deposit. Another big difference is that buy to let mortgages are usually interest-only, rather than repayment, so you don’t pay back any of the capital you owe until the end of the mortgage term. The advantage of this is that your monthly payments will be lower, but the downside is that if property prices fall while you own the property, there is a risk that when you come to sell it, you might not end up with enough to pay off the mortgage. Under current rules, you can claim tax relief on your mortgage interest payments at your marginal rate of tax, but this is due to change in April 2017 when tax relief will be at a flat rate of 20%.
You can’t apply for a residential mortgage on a property which you let out, as if your lender discovers you are doing this, they could either ask you to repay the mortgage immediately, enforce financial penalties, or switch you to a higher buy-to-let rate. It’s also worth bearing in mind that if you rent out a property without a buy to let mortgage, your household insurance would be invalidated in the event of a claim for damage caused by your tenants. If you are going to let your home, you therefore need to let your lender know and switch to a buy to let mortgage.
Whereas you can take out a residential mortgage with a deposit as little as 5% of the property value, you’ll usually have to stump up at least 25% of the property value if you’re looking to secure a buy to let mortgage. As with residential mortgages, the bigger the deposit you can afford to put down, the better the buy to let mortgage deals you will have access to, with the best buy to let rates typically offered to those with a deposit of 40% or more.
Unlike a standard mortgage, where the amount you can borrow is linked to your income, with a buy to let mortgage, the lender will instead look at how much rent you are expecting to make from the property on which the mortgage is secured. As a general rule, they will often expect the rental income to be 125% of the mortgage payment, but this can vary depending on which lender you go to. So, for example, if the property you are buying will cost you £12,000 a year in mortgage interest, the lender will need to see that you’re expecting to generate at least £15,000 in rent each year. Use our buy to let mortgage calculator to help give you an idea of what you can borrow based on your expected rental income.
Bear in mind some lenders will also require you to have a minimum annual income before they will offer you a buy to let mortgage. This is so that they can be certain you will be able to cover the mortgage during those times when you may not have a tenant to rent the property, known as ‘void’ periods.
As with residential mortgages, there are loads of different buy to let mortgage deals to choose from. Some of the lowest rates are tracker deals, which track the Bank of England base rate plus a set percentage. So for example, if a deal tracks the base rate plus 3%, then given the base rate is currently 0.25%, this would give you a current payable rate of 3.25%. The downside of a tracker deal is that the rate is variable, and so will go up and down at the same time as the base rate. Other types of variable mortgage deals include discounted buy to let mortgages, where the lender offers a discount off its standard variable rate, or capped mortgage rates, where again payment can fluctuate but will never exceed a certain limit, or cap. If you are worried about rates rising in future, you may instead to prefer to opt for a fixed rate buy to let deal. As the name suggests, with a fixed rate buy to let mortgage, the rate is fixed for a certain period, giving you peace of mind that payments won’t increase during this time. This can be a big benefit for landlords who want the certainty of knowing exactly what they need to pay each month.
Once you’ve successfully applied for a buy to let mortgage deal, you shouldn’t just sit back and forget about it. Like standard mortgages, buy to let mortgage deals typically only last for a few years before reverting to a more expensive variable rate. If you don’t want monthly payments to shoot up when this happens, you’ll need to remortgage to another buy to let deal. Remortgaging can also be useful if, for example, you need to release extra funds to make improvements to the property you let out.
With so many different buy to let mortgage deals to choose from, it’s not always easy to work out which one is going to be the right choice for you. That’s why we’ve come up with our easy comparison service, so that you can see which buy to let mortgages are available, and how much they will cost. Remember that you shouldn’t base any mortgage decision purely on the rate alone, as arrangement fees can substantially bump up the overall cost. In some cases, depending on how much you need to borrow, it can work out to be more cost-effective to choose a deal with a low arrangement fee and a slightly higher rate. If you’re not sure which buy to let deal to go for, we at L&C can guide you through the process from start to finish, making finding the right mortgage as painless as possible.
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