Buy-To-Let Mortgages: What You Need to Know Before Applying

 

Introduction

 

A buy-to-let mortgage is a loan that is specifically for people who want to buy a property to rent out to tenants. The key difference between a normal mortgage and a buy-to-let mortgage is that the latter is usually based on the rental income that the property will generate, rather than your personal income.

Whether you are a first-time buyer or an experienced landlord, it is important to understand how buy-to-let mortgages work before you apply for one. In this article, we will cover the following topics:

 

  1. What is a buy-to-let mortgage?
  2. Who can apply for a buy-to-let mortgage?
  3. How much can you borrow with a buy-to-let mortgage?
  4. What are the interest rates on buy-to-let mortgages?
  5. How are buy-to-let mortgage payments calculated?
  6. Are there any special features of buy-to-let mortgages?
  7. What are the risks of taking out a buy-to-let mortgage?

 

  1. What Is a Buy-to-Let Mortgage?

 

A buy-to-let mortgage is a loan that is specifically designed for those who want to purchase a property to rent out to tenants. This type of mortgage is typically based on the potential rental income of the property and the amount of deposit you are willing to put down. Unlike with a traditional mortgage, banks and lenders usually require deposits of between 25-40% when applying for this type of mortgage.                                                        As with any mortgage, it is important to go through all of the fine details available before you commit. The purpose of a buy-to-let mortgage is to help you purchase a rental property, with the rental income generated from it paying the cost of holding the loan. This type of mortgage is slightly different from the traditional residential mortgage and is more commonly used by those who already own more than one property.

 

  1. Who Can Apply for a Buy-to-Let Mortgage?

 

Not everyone can apply for a buy-to-let mortgage. Buy-to-let mortgages are normally only available to those who are experienced landlords or those with a good understanding of the rental property market. It is also important to note that lenders may also have specific requirements in terms of the size and value of the property before they will accept your loan application. To be eligible for a buy-to-let mortgage, you must first be over the age of 18 and have a good credit rating. You must also be able to prove that the income generated from the rental property will be enough to meet the mortgage payments, even during periods when the property is not rented out. Most lenders will also require applicants to have some form of income from outside of the property, so those who are dependent on rental income alone may struggle to be approved for such a loan.

 

  1. How Much Can You Borrow with a Buy-to-Let Mortgage?

 

The amount that you can borrow with a buy-to-let mortgage will depend on several factors, including your financial history and the type of loan that you are applying for. Most lenders will lend up to a 75-80% loan-to-value (LTV) ratio on rental properties, although this could be higher if you have a good track record of repaying your other debts. When looking at the amount that you can borrow, it is important to remember that lenders prefer to lend money to those who can demonstrate a good ability to manage their finances. As such, your loan application will likely be assessed more favourably if you demonstrate that you can manage your other debts in addition to your mortgage.

 

  1. What Are the Interest Rates on Buy-to-Let Mortgages?

 

Buy-to-let mortgages typically have higher interest rates than standard residential mortgages. This is because lenders view rental properties as having a higher risk, as rental payments from tenants are not always guaranteed. The interest rate you are offered on your buy-to-let mortgage will depend on several factors, including your creditworthiness and the amount that you are intending to borrow. It is also important to remember that most buy-to-let mortgages come with variable interest rates, which can fluctuate over time. This means that the amount that you pay in interest each month may change depending on the current market rate. Fixed-rate buy-to-let mortgages are available, although they may come with higher costs and less favourable terms.

 

  1. How Are Buy-to-Let Mortgage Payments Calculated?

 

When it comes to how buy-to-let mortgages are calculated, lenders typically consider two main factors. These are the amount that you have borrowed, and the rental income expected from the property. The rental income will be assessed and compared to your other debts and responsibilities, and a decision will be made as to whether or not you will be able to afford the monthly repayments. Most lenders also apply a stress test to landlords’ income to ensure that the rental income covers their debts and expenses. The stress test involves deducting a set amount from the calculated rental income, to allow for any unforeseen costs such as maintenance, taxes and void periods.

 

  1. Are There Any Special Features of Buy-to-Let Mortgages?

 

Yes, some buy-to-let mortgages come with special features that make them more attractive to potential buyers. Some lenders offer ‘rental assurance’, which is a type of insurance that covers any shortfall in rent should your tenant fail to pay. Other features include ‘portfolio management’, which allows you to manage multiple properties within the same loan agreement, and ‘top-up facility’, which allows you to access additional funds should you need to make repairs or invest in other property-related activities.

 

  1. What Are the Risks of Taking Out a Buy-to-Let Mortgage?

 

As with any loan, there are risks associated with taking out a buy-to-let mortgage. The main risk is that rental income is not always guaranteed, and you could find yourself in a position where you cannot afford the monthly repayments due to a lack of rental income. This could result in you suffering from loss of capital, unaccounted-for costs and a damaged credit score. Additionally, buy-to-let Mortgages are more expensive than residential mortgages, and lenders’ requirements for acceptance may be more stringent. As such, you need to make sure that you understand the terms of your loan agreement before you commit.