Looking for the best mortgage to buy your primary home can be an emotional rollercoaster. At the end of it, you will have gained valuable knowledge and wisdom to guide you through the deep waters of the mortgage market.
However, you may not be able to apply the same strategy to find a buy to let mortgage for your rental investment. Indeed, buy to let mortgages are a different type of mortgage, but our team of advisors at Limetree Financial Services can guide you through the decision.
How does a buy-to-let mortgage differ from a residential mortgage?
Unlike a residential mortgage, which helps you finance the purchase of the home you live in, a buy to let mortgage focuses on properties designed as an investment. When you buy for the rental market, you need to have a buy-to-let mortgage. Indeed, standard residential mortgages follow a different set of criteria established by lenders and don’t meet the requirements for a rental property.
A buy to let mortgage is a potent financial tool for both experienced investors with pre-existing rental properties and aspiring landlords. Due to its unique role in the financial portfolio, the BTL mortgage is more expensive than residential financing. Therefore, it isn’t suitable for every budget. While a standard mortgage requires a deposit of at least 5% of the property’s value, buy-to-let mortgages can need up to eight times the amount. Investors are expected to pay from 25% to 40% deposit. Additionally, a BTL mortgage also comes with a higher interest rate, compared to its residential counterpart. As the purchased property is not your main home, you will also pay more stamp duty.
The majority of borrowers take an interest-only BTL mortgage for their investment, which means their monthly payments only cover the interest on the loan. Unlike residential mortgages where monthly payments reduce your capital debt, the interest-only basis relates to the accrued over time interest on the borrowed amount. The capital debt is then paid in full at the end of the agreed mortgage term unless borrowers choose to make extra payments or to take out a repayment mortgage.
How much does a buy to let mortgage cost?
The cost of your BTL mortgage will vary depending on the value of the rental property. Additionally, lenders’ criteria and tax duties will also affect the operation. If you are in the process of finding a buy-to-let mortgage, here’s what you need to know:
Lenders seek safety when it comes to your investment. Therefore, they will consider not only your personal circumstances during the application process but also rental-only factors such as:
- How much deposit you can afford to pay
- How much your rental income will be
The deposit protects the lender in the event when you can’t make monthly payments as a result of an issue with rent collection, for example.
Your rental income acts as a repayment fund for your BTL mortgage. Consequently, lenders expect landlords to earn more in rent than they have to pay monthly.
Additionally, as the mortgage interest relief restriction has been phased out in the UK, landlords have been considering new strategies to keep their rental portfolio profitable. To maximise their investment and reduce costs, investors sometimes choose to become a limited company. The process can help recoup losses through tax advantages, such as claiming mortgage interest as business expenses. Using a limited company for your rentals is a popular alternative, even though a limited company BTL mortgage can be more expensive and requires additional admin work and setup costs.
What type of buy to let mortgage is right for you?When it comes to BTL mortgages, borrowers have a choice between interest-only mortgages and repayment mortgages.
Interest-only buy to let mortgageLandlords and investors with a portfolio of more than one rental property tend to use an interest-only BTL mortgage. Monthly payments are low as they focus on the accrued interest on the borrowed amount. The capital debt is to be paid in full at the end of the fixed-term. Investors can then choose to sell the property to make full repayment and, hopefully, make a profit from any potential house inflation price.
Repayment buy to let mortgageA repayment mortgage type enables landlords to pay for the property in full during the BTL mortgage term. For landlords who are looking to own their rentals fully, the repayment mortgage option is similar to a standard residential mortgage where monthly payments gradually reduce the capital debt. Your investment strategy will determine your choice of a buy-to-let mortgage.
Understanding interest rates and buy to let mortgages
When you pay interest on the loan, both as part interest-only mortgage or a repayment mortgage repayments, you need to understand the different types of mortgage available and how they handle interest rates.
- Tracker mortgages use variable rates for which they track the Bank of England’s base rate, relying on a set percentage above or below. Therefore, if the Bank of England’s rate falls, the interest on the monthly payment will follow the same motion. It can be problematic when the rates increase.
- With fixed-rate mortgages, the interest rate stays the same during the agreed period of time. As a result, payments are more manageable.
- Offset mortgages reduce the overall interest by offsetting the borrower’s savings against the outstanding balance. However, investors who are looking for an income-boosting portfolio across the totality of their financial assets will not make any gain for their savings’ interests.
- Capped rate mortgages use a variable rate that sets a limit on how high the rate can inflate. It is a helpful deal for borrowers who are concerned about rate rise and unaffordable payments.
- Discounted mortgages are similar to tracker deals, in the sense that they also use a variable rate. The mortgage offers a discount on the lender’s standard variable mortgage rate for a set period. Discounted mortgages are at the lender’s discretion.
Where do I find my buy-to-let mortgage?
Just like with residential mortgages, you will need to improve your credit history to appeal to lenders, save for your deposit, and compare different mortgage deals. Additionally, experienced investors recommend finding profitable and popular rental locations and properties to boost your investment portfolio.