A Guide to Buy to Let Mortgages
What is a Buy to Let Mortgage?
A buy to let mortgage is essentially a mortgage that is not for your own residential needs. If you’re looking to buy a property for investment purposes and rent it out to tenants, a buy to let mortgage can help you facilitate the initial purchase of the property.
How Does a Buy to Let Mortgage Work?
Getting a buy to let mortgage is largely based on the rental income your desired property will yield and some lenders will also have certain criteria that borrowers must adhere to, such as having a certain level of income per month.
The property you are planning to buy and let out will be assessed on rental income by a mortgage lender, as opposed to a standard residential mortgage where your affordability is assessed largely through your income and outgoings.
A lender will use what’s known as an ICR mortgage calculation when it comes to assessing the rental income the property is likely to generate. This calculation formula will differ from lender to lender and is done to ensure there’s an element of security for the mortgage lender if you as a landlord fail to secure a rent-paying tenant for your property and therefore keep up with your monthly mortgage repayments.
You may be concerned about securing a buy to let mortgage if you don’t already own a property, but our access to specialist lenders means first time landlords do have the opportunity to own a buy to let property and succeed with a buy to let mortgage application.
How Important is Your Income With a Buy to Let Property?
Whether your mortgage is residential or buy to let, your income will be considered to some extent by all lenders.
This is because lenders want to ensure you will be able to keep up with your mortgage payments in the absence of a rent-paying tenant. Some lenders will have set criteria on how much a borrower needs to be earning and some will just require you to have a certain level of employment. By approaching a mortgage broker like us, we can ensure you are in touch with lenders who suit your financial circumstances.
How much deposit do you need for a buy to let mortgage?
As is the case with most mortgages, the deposit amount that’s required will vary depending on the lender and your personal financial circumstances. However, as a ballpark figure, a 25% deposit will stand you in good stead in the marketplace.
As the market is changing and progressing, lenders alter their criteria regularly. Chatting to a mortgage broker who can assess your situation is your best bet for securing a more accurate deposit amount that a lender will require.
Interest Only vs Repayment Buy to Let Mortgages
As a rule of thumb, most buy to let mortgages are on an interest only basis.
Interest only buy to let mortgages are popular among landlords as their monthly repayments are kept to a minimum in order for them to generate a healthy profit from the rent they yield. Once the mortgage term has ended, landlords tend to sell the property to pay off the remaining mortgage amount (with the hope that their property has increased in value).
Some landlords opt for repayment, where they pay the interest and a certain amount of capital off each month for the duration of the mortgage term. This means that when the mortgage term ends, everything has been paid off fully.
When Should You Approach a Mortgage Broker?
If you’re looking into buying any property, it’s always best to approach a mortgage broker first.
Even with buy to let mortgages, it means you can establish how much you should ideally be spending on a property and how much you can actually afford. Rather than finding the perfect house and approaching a broker, only to realise the house is out of your budget and the area it’s in means it won’t generate enough rental income for you to even cover your mortgage payments.