Buy To Let Mortgages – What you need to know
Pete has just inherited £35,000 from his grandma and he’s thinking about investing in a buy-to-let property but has no idea where to start. So, what are the key things Pete needs to know?
Is the buy-to-let market a good investment?
Some of Pete’s friends have warned him that the buy-to-let market is still reeling from the effects of the covid pandemic. They claim, with more people working from home, there has been a population shift away from major towns and cities – reducing the demand for rental properties.
However, figures from Zoopla suggest that the buy-to-let market is enjoying something of a resurgence since covid restrictions eased. Demand for rental properties was reportedly up 76% in January 2022 compared to the same month in the previous four years. In addition to this, the stock of rental properties was down 39% on the five-year average, with rents rising sharply. All of this suggests that a buy-to-let property may well be a wise investment for Pete.
Is Pete likely to be accepted for a buy-to-let mortgage?
To be accepted for a buy-to-let mortgage, Pete needs to:
- Own his own home (outright or with a mortgage)
- Have a good credit report
- Earn over £25,000 a year
- Be young enough to pay off the buy-to-let mortgage before he reaches the lender’s upper age limit (generally between 70 and 75 years old)
Pete meets all of these requirements so, in theory, there’s nothing stopping him getting a buy-to-let mortgage.
So what else does Pete need to know about buy-to-let mortgages?
Buy-to-let mortgages are very similar to standard mortgages but there are some key differences Pete needs to be aware of:
- The minimum deposit is typically 25% of the property’s value
- Fees and interest rates on a buy-to-let mortgage tend to be higher
- Most buy-to-let mortgages are interest only, although there are repayment ones available. With an interest-only mortgage, you don’t repay the capital until the end of the mortgage term.
How much will Pete be able to borrow?
The amount Pete will be able to borrow is linked to the rental income he expects to achieve. Lenders usually ask that the rent you receive each month is 25-30% higher than your mortgage payment.
Other considerations for buy-to-let landlords
Pete shouldn’t assume that he’ll always have tenants. It’s important that he’s able to make his mortgage payments during periods the property is unoccupied or rent goes unpaid. He will also need savings for unexpected repair bills such as a broken boiler.
As well as these considerations, Pete needs to make sure he’s thought about how he’ll repay the mortgage. He shouldn’t assume he’ll be able to do this in full by simply selling the property. If house prices go down, there may be a shortfall for him to make up.
Buy-to-let and tax
Pete also needs to consider the tax he’ll have to pay as a buy-to-let landlord. As well as income tax on rent, Pete will be looking at paying capital gains tax on the sale of the property. It’s important that he factors this into his calculations when deciding if a buy-to-let investment is right for him.
The importance of professional advice
If Pete’s still keen to go ahead with a buy-to-let investment, the wisest thing he can do is speak to a professional mortgage adviser. They’ll be able to assess his particular circumstances and explain the options that are open to him.
If you’d like advice on buy-to-let mortgages, we’re here to help.
- To qualify for a buy-to-let mortgage, you generally need to own your own home, have a good credit report, earn over £25,000 a year and be able to pay off the mortgage before you reach the lender’s upper age limit.
- Buy-to-let mortgages tend to have higher fees and interest rates than standard mortgages.
- Most buy-to-let mortgages are interest only.
- It’s important to consider the tax implications of a buy-to-let investment.
- There are a lot of factors to consider before entering the buy-to-let market – a professional adviser can help you decide if it’s a wise investment for you.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.