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If you are planning on purchasing a property to rent out you may need to consider a buy-to-let mortgage. The rules around buy-to-let mortgages are similar to those around regular mortgages however there are some differences.
What is a buy to let mortgage?
A buy to let mortgage is a loan that is designed for landlords who will rent out a property rather than occupy it. As it is classed as a business transaction, rates are generally higher than those of a residential mortgage.
Who Can Get one?
There is certain borrowing criteria attached to these types of mortgages. Unlike a residential mortgage where rates are calculated on the applicant’s salary, the mortgage lender applies a rent to interest (RTI) cover calculation. The rental income you receive generally has to be between 125-130% of the monthly mortgage payment. To determine this, usually lenders will assess how much rent you will earn from the property each month, verifying this with a survey. Most lenders also require a minimum of £25k per annum in addition to income from rent.
Where can I find one?
Dependent on your investment strategy, whether you are looking to purchase one or two properties or build a portfolio, will vary your choice of lender. A high street lender or bank is a popular choice for many, but if you intend to build a large portfolio then a specialist lender may provide a better choice.
What types of mortgages are available?
Interest Only… The majority of buy-to-let loans are interest only, not repayment. This however will depend on the individual’s strategy towards property investment. The advantages with interest only mortgages are that repayments are generally lower as you only repay interest on the amount you borrow. You’ll need to know and show proof from the start of how you intend to pay the final lump sum. By choosing this option, investors have the cash flow to reshuffle their property capital in order to increase their overall number of properties.
Capital Repayment… A capital repayment mortgage allows investor to repay the full loan and any interest over a fixed term. The obvious difference between the two being that at the end of the term, the landlord owns the property. These loans are more popular with investors who have or are looking to build a small portfolio, generally focusing on capital appreciation and rental yields.
Which Should I Choose?
The lender and loan you choose will mainly depend on your own personal circumstances and your property investment strategy. There are advantages and disadvantages for both, however the key to success is through your own due diligence. Research and identifying the best rate will stand you in good stead for future investment.