Buying a House > Buy-to-Let Mortgages

For a lot of young people, the idea of ever owning a home is nothing but a distant dream. Rising house prices, rocketing rents and a bleak economic forecast mean that Britain’s young adults are set to be the country’s first-ever generation rent.

Sorry for being pessimistic, but it’s the truth. According to figures by the Ministry of Housing, Communities and Local Government, the number of 25 – 34 year-olds renting privately has hit 46%. This figure is almost double the 27% figure from a decade ago in 2006/2007.

However, while this bleak outlook may be the reality for many young adults, it’s not the case for everyone. Some people are fortunate enough to buy a property as an investment, with no plans to live in it.

Of course, this doesn’t necessarily mean that these people are rich, although they might be. That said, it also may be that these people are still living at home with their parents. The Office of National Statistics recently revealed that 26 percent (3.4 million) of young adults are currently living with their parents. This figure has risen year-on-year, with a million fewer young adults living with their parents in 2002.

For people who are looking to invest in property and not occupy it, the buy-to-let mortgage exists to assist them through the process. But what is a buy-to-let mortgage and how does it work?

 

What is a Buy-to-Let Mortgage?

To put it simply, a buy-to-let mortgage is a mortgage that exists specifically for people who buy a property without plans to live in it. The buy-to-let mortgage is different from the standard mortgage, meaning that if you plan to rent out your property, you will not be able to finance your purchase with a standard residential mortgage.

 

How does it differ from a Standard Mortgage?

The payments you make on a buy-to-let mortgage work in a different way to the standard residential mortgage. Buy-to-let mortgages tend to be offered on an interest-only basis, meaning that your payments will only cover the interest on the mortgage and not the mortgage itself.

The capital interest – otherwise known as the money that you have borrowed – will not be paid off by these monthly payments. The capital interest will need to be paid off in full at the end of the mortgage term. You can do this by either selling the property, or you can keep the property and take out another mortgage.

Not only does the payment plan differ from a residential mortgage, but a buy-to-let mortgage also requires a larger deposit, involves larger fees and a higher rate of interest and stamp duty, as the property is not your main home.

The added expensive is due to the risk factor involved in a buy-to-let mortgage. For mortgage lenders, buy-to-let mortgages carry a greater risk than a residential property. While most landlords can cover their repayments (and a little bit extra!) through the rent they receive, there may be months when the tenants don’t pay rent on time or when there are no tenants in the property paying rent. But, despite the risk, because monthly payments on a buy-to-let mortgage only cover the interest, they tend to be lower than the payments required on a residential mortgage, allowing landlords to pocket more money for themselves.

Deposits for Buy-to-Let Mortgages

As mentioned, lenders that are willing to issue a buy-to-let mortgage will require that you put down a larger deposit than would be required on a residential mortgage. The deposit needed to secure a buy-to-let mortgage tends to be around 25%, but it may be as high as 40% in some cases. The larger deposit is required by the lender as it protects them should you not be able to pay your monthly payments for whatever reason.

However, while the initial outlay may be higher, there are some benefits to a larger deposit. Paying more initially means that your monthly costs will be lower, allowing you to bank a bigger percentage of the rent paid. Not only that but a larger deposit will also lower the sum of money that you will need to pay off or refinance at the end of your mortgage term.

Despite the deposit for buy-to-let properties being larger than residential mortgage deposits, the price of a buy-to-let property tends to be substantially cheaper than a residential property. The average purchase price for a buy-to-let between 2016 – 2018 was £183,287, compared to £272,425 for the average residential property.

This figure could be down to the fact that buy-to-let landlords are looking for cheaper properties, as they have to stump up bigger deposits to secure the buy-to-let loan. The figure also suggests that buy-to-let landlords are flexible when it comes to their property search, with the key requirement being that the property is attractive to potential tenants.

 

What types of Buy-to-Let Mortgages are available?

There are different buy-to-let mortgages available and the amount of interest you pay will depend on the type of mortgage you choose, the amount you borrow, your financial situation and how much income you are expecting to receive from the property.

There are three types of buy-to-let mortgages for you to contemplate before making your choice.

Tracker mortgages

A tracker mortgage means that the lender sets the interest rate they will charge at a certain percentage above the Bank of England’s standard rate. The BoE rate can change, meaning that your mortgage repayments can also change from month-to-month. If the bank’s rate increases, your mortgage repayments will go up. Likewise, if they decrease, your mortgage repayments will go down.

Discounted variable mortgages

A discounted variable mortgage is a sales technique used by many buy-to-let mortgage providers to attract new customers. The mortgage is offered at a fixed percentage below your lender’s standard variable rate. For example, a 2% discount on a variable rate of 6% means that you will pay an interest rate of 4% on your mortgage. While your lender’s interest rate may change, your discount will remain the same, so if the variable rate changes to 5%, you will pay 3% due to your 2% discount.

As mentioned, discounted variable mortgages tend to be a sales technique for new customers, with the majority of them only lasting two years before being moved onto the lender’s standard variable rate.

Fixed-rate mortgages

A fixed-rate mortgage allows you to keep your mortgage repayments at a low rate for either two, three, five or ten years. The rate of those payments will be determined by the mortgage provider when they offer you the loan.

At the end of the fixed-rate period, your payments will be switched to the mortgage provider’s standard variable rate, which is often higher than the fixed-rate, allowing you to look for a new deal.

Once your buy-to-let mortgage has run the length of its term, you will need to repay the full value of the mortgage. There is the possibility of being able to extend your mortgage, or you may choose to sell the property to pay off the mortgage.

If house prices have risen during your ownership of the property, you may be able to make a fairly large amount of profit. However, if the price of property has taken an unexpected down-turn, you will still be required to pay off the original mortgage sum yourself, so you could end up losing money. This is a risk that many landlords are willing to gamble on as, with the current state of the housing market, it’s unlikely that you will lose money when selling a buy-to-let property.

 

Who can get a Buy-to-Let Mortgage?

Given the risk involved with buy-to-let mortgages to lenders, they have stricter requirements for who can get a buy-to-let mortgage and different criteria to that of a residential mortgage.  You need to have an income of at least £25,000, and the lender will also run checks on your existing debts and credit record. There is also an age limit for buy-to-let mortgages, which most lenders cap at around 70-years-old, meaning those who are 50+ cannot take out a 25-year mortgage agreement.

Additional Fees when owning a Buy-to-Let Property

While renting a property to tenants is seen as a sure-fire and easy way to make some money, there are fees come with being a landlord. If you’re thinking about purchase a buy-to-let property, it’s important to budget for these fees and assets whether or not you can afford to pay them alongside your mortgage repayments.

As a landlord, you will need to income tax on rental payments, as well as paying for landlord insurance, rent insurance, maintenance work, repairs and estate agent fees should you choose to use them. There’s also a host of landlord regulations and responsibilities to be aware of before you decide to get a buy-to-let.

While landlords of buy-to-let properties used to be able to deduct the interest they paid on their mortgage from their taxes, this tax relief is now being phased out. From April 202, mortgage interest will no longer be deductible from landlord taxes. However, that said, buy-to-let landlords will be able to claim for a 20% tax credit for the interest that they pay on their mortgage.

How to know if a Buy-to-Let Mortgage is right for you?

If you’re in the market for a buy-to-let mortgage, it’s best to do your research before you commit. Using a mortgage comparison tool will give you an idea of what your monthly costs might be and give you a better understanding of the buy-to-let mortgage system.

While these comparison sites and quotes are useful, please be aware that they are not set in stone and only serve to give you an idea of how much your repayments will be. You will still need to get an agreement in principle and a firm mortgage offer to find out whether you qualify for a buy-to-let mortgage, and what your interest rate will be.

There’s a lot to get your head around when it comes to buy-to-let mortgages, with there being plenty of variables to contend with during the process. However, for those of you who have the money to invest in a buy-to-let mortgage, the scheme can be a useful way to make a fair amount of money through the ever-rising property and rental markets.

The repayments may only cover the interest of the mortgage, but the fact that lender requires a bigger deposit, and that property prices and rental fees tend to increase in value year-on-year, make the buy-to-let mortgage an attractive proposition to plenty of people.

However, that said, there is an element of risk involved. Yes, the property market may be continuing to rise, but with the unstable political landscape and conflicting financial forecasts, there is a risk that it could crash. Not only that, but depending on the are you buy in, you might have trouble finding tenants and collecting rent, which could lead to you not being able to afford your mortgage repayments.

As always, if you’re ever unsure about the terminology used or any part of the buy-to-let mortgage process, do not sign on the dotted line until you have a clear understanding of what you are getting yourself into. While lenders may pressure you with ‘one-time offers’ and sales-speak, do not rush into anything and don’t be afraid to ask questions and take time to consider your options. Yes, a buy-to-let may result in you making money down the line, but the initial outlay is huge and you need to be aware of what it involves.