If you are considering buying a property as an investment and want to boost your profits by renting the property out, you can’t access a regular mortgage like everyone else, you will need to apply for a buy-to-let (BTL) mortgage. These are, however, a specific product that need to be chosen carefully.
Whether you are someone growing their rental portfolio or an accidental landlord looking for financing, the good news is that the increase in the range of products on the market currently provide you with plenty of options.
What’s the Difference with Buy-to-let Mortgages?
The first thing to note is that buy-to-let mortgages tend to come with higher fees and interest rates. The minimum deposit is around 25% but can range between 15 and 40% depending on the location and the property as well as the landlord’s circumstances.
Most BTL mortgages are what are called interest-only products although they are available on a more traditional repayment basis. Generally, the amount that you can borrow for a property depends on the level of rent that you will be charging, many lenders require the rent to be 25% above the mortgage repayments. You will need to talk to your local letting expert to understand what rental income you might expect so you can better understand what you can afford.
Buy-to-let Options
One of the most important things when setting up a buy-to-let mortgage is your interest rate and how much you are going to end up paying. Two things affect this, according to Which?. The first is how much deposit you put down. The second is whether you are already a buy-to-let landlord.
The lowest deposit you can find for a BLT property is 15% but only three providers offer this in the UK, and they are: Kensington, Vida and Kent Reliance, all companies that operate in the South West. If you have 20% deposit available, the news is better, because there are 18 providers across the UK.
Most first time BLT buyers, however, will need to find a minimum 25% deposit if they want to find a good range of mortgage providers and plenty of options with most major lenders offering BLT products. Some do provide 20% deposit BLT mortgages for first timers but they are few and far between.
Rates for BLT Landlords
The big focus for BLT mortgages is the interest rate that is charged. If you can plump up the 25% deposit, you should find yourself getting the same rates whether you are a first-time landlord or someone with a larger portfolio. Don’t just look at the headline rates, though, as there are often fees and other charges which you will need to consider.
One thing that landlords need to think closely about is whether they want an interest-only mortgage or a repayment one. A lot depends on what you want to achieve. Most landlords with a wide property portfolio will opt for interest-only because the full loan is paid off at the end of the term. Don’t, however, fall into the trap of assuming the mortgage will be paid off simply by selling the property at the end of the term as house prices might fall leaving you with a shortfall.
To first time BLT landlords, this can seem strange. Why not pay off the mortgage as much as possible before the end of the term? You end up with more profit if you can pay off early. The truth is you have to offset this with the profits you are getting from rental income with a smaller mortgage
If you view your rental property as a long-term investment, there are a lot of benefits from an interest-only deal and a lot more products on the market as well. This is especially true if you are looking to expand your portfolio because the lower overheads that come with interest-only arrangements are certainly beneficial.
Choosing the right mortgage for your BLT property is important from the outset. It’s vital to shop around and pick an option that fits not only your short-term financial position, but your future aims as a buy-to-let landlord. In all cases we would advise seeking professional financial advice from a trusted IFA and seek to partner with a local property expert. At Northwood we have 20 years’ experience, over 85 offices and over 20,000 landlords nationwide, find out more about why Landlords choose Northwood here.
