A buy to let mortgage is ideal for investors who buy a property to let it out. The rent received covers the monthly mortgage repayment and monthly expenses. The investor typically bides his time waiting for the property value to go up so he can sell it and make a profit. Sometimes, the rent may not cover the mortgage installments and the monthly expenses. It is also known as an investment mortgage and makes for excellent retirement planning.
Buy to let mortgages FAQ
Are such mortgages popular?
Yes as they offer the following advantages:
- The option to hold a property as an investment without having to pay the monthly installments
- Demand for UK rental accommodation in rising.
- These are best mortgages for retirement planning.
How much is the investor/landlord required to invest?
Mortgage deals in UK require the investor/buyer to invest 20% to 40% of the property’s value. These mortgages' rates of interest is higher.
What are the risks?
The property may lie vacant for a long time making mortgage payments difficult.
House prices may not rise.
If interest rates go up, they can throw all calculations off-gear.
What factors do mortgage lenders consider?
The likely rental income, borrower’s annual income, his credit report and liabilities. The likely rental income should typically be 130% of mortgage repayment. Lenders also take into account expenses such as maintenance, insurance, decorating, etc.
Example: if your monthly repayment to the mortgage company is £5,000/month, the mortgage company will first ensure that the rent you will get is £6,500/month.
Should I appoint a letting agent?
A letting agent can help you understand the demand and the rental income potential. He is
well-connected with lenders as well.
What are the different types of buy to let mortgages in UK?
- Fixed rate mortgage, in which the rate of interest is fixed and does not change
- Variable rate mortgage, in which the rate of interest fluctuates in keeping with banking policies
- Capped rate mortgages, where the maximum rate of interest which can be charged is capped
- Minimum status mortgages are available for borrowers who do not meet all the standard requirements (meaning, they meet the ‘minimum’ number of requirements)
- Self-certified mortgages are meant for businessmen who have to self-certify their income sources, repaying capabilities, etc. These are very difficult to get in times of economic downturn. Advice
Before going in for a buy to let mortgage, hire an accredited and reputed letting agent and understand the market potential. Use online calculators to figure out where and how you will stand a couple of years down the line - calculate based on the worst possible scenario of zero rental income. Remember that buy-to-let mortgages make for excellent retirement planning.