What is a Buy-to-Let Mortgage?
Much like the name suggests, a buy-to-let mortgage is a mortgage type that applies specifically to houses that are bought with the intention of letting it out. Unlike a residential mortgage, many landlords will rely on the rent generated by the property to repay the loan rather than an external source of income such as their job.
Because of this, the risk associated with loans on rental properties is higher than that of residential properties. The differences in terms of the two mortgage types are primarily to reflect and reduce this risk for the provider.
Similarly to a residential mortgage, the total loan amount is calculated using several different factors including the price of the house, the deposit percentage (the minimum for a buy-to-let property is usually around 25% compared to the 10% of a residential), and the length of the repayment term. However, the expected rental income is usually the main deciding factor. Most providers specify that this should be 25-30% higher than the monthly mortgage repayments. This helps to safeguard the repayments during low-income times (when the house is empty either initially or between residents).
Buy-to-Let mortgages also commonly use interest-only repayment terms. This means that the property owner need only repay the interest on the total loan until the end of the agreed term, at which point the debt will need to be paid in full. Other repayment options where the house, including interest, is paid off over the agreed term, are available but much rarer. The interest charged on these mortgages is typically greater than that of residential to accommodate the increased risk, so interest-only terms are much more widely available.
However, these payments will not be affected by whether the house is generating profit. Time between tenants is expected, so it’s best to have contingency plans in place so you are not relying solely on the rental income to pay off the mortgage. Much like regular mortgage applications, many providers will run credit checks to ensure you are a good candidate who will be able to keep up with repayments. As buy-to-let mortgages are by name dependant on the property being let, they also have a right to make sure you understand your responsibilities as a landlord. This is especially important if this is the first house you are letting.
As well as assuring them of your landlord capabilities, the majority of buy-to-let mortgage providers will require you to already own a residential property. This means that you will have to pay capital gains tax on your new property which may not necessarily affect the rate of the mortgage, but it is certainly something to bear in mind.
The good news is, until March 2021, buy-to-let investors can benefit from a tax cut thanks to the government’s new stamp duty holiday. Although you’ll still have to pay some stamp duty, rates have been dropped to 3% of the property’s value up to £500k, meaning you could save a few thousand pounds on your next investment.
For more information about buy-to-let mortgages, get in touch with our independent financial advisors today. The team is always on-hand to help you make informed decisions about your finances.