Buy to Let Mortgage

Buy to let mortgages were introduced in the mid 1990s at a time when residential lettings were at their lowest. They have quickly grown in popularity with property investors so much so that they were a major cause of the property boom in the late 1990's and early 2000's. Last year, approximately 1 in 6 mortgages approved were for buy to let purposes.

What is a Buy to let mortgage?

A buy to let mortgage is a mortgage for landlords that enables them to purchase a property in order to rent out. Buy to let mortgages are ideal for property investors either for growth or to generate a monthly income. In essence, buy to let mortgages operate and are repaid in much the same way as a standard residential mortgage. The key difference being that the property will be let out to tenants.

Generally speaking, buy to let mortgages require a larger deposit as they are considered investments and typically the maximum loan to value a lender will provide will be 85%.

It is assumed that the mortgage repayments will be paid via the rental income received and as such, the lender considers the potential rent instead of the borrower's income when making a decision on the loan. The lender will need to establish whether the property is 'self sufficient' which means that the rental income should be able to cover the mortgage repayments. Typically, lenders will use a simple calculation to establish whether a buy to let is possible. These calculations only serve as an indication and every lender with have different methods for assessing a buy to let mortgage.

Firsly, the rental income should provide an annual yield of around 8% interest only (depending on the lender).

Example: a buy to let mortgage of £125,000 would need to produce a rental income of at least £833pm (£125,000 x 8% / 12).

Secondly, the rental income should be at least 130% of the mortgage repayment.

Example: The monlthy repayments for an interest only buy to let mortgage of £125,000 at a rate of 6.5% are £677pm. This means that the rental income needs to be at least £880pm (£677 x 130%).

The amount you can borrow for a buy to let mortgage depends both of the property value and the above calculations. Some lenders also consider the type of tenant when assessing buy to let mortgages. For example, you may pay more if you plan let to students as opposed to professional married couple due to the additional risk.

There is no limit to how many buy to let mortgages you can have as they are considered self sufficient (although some lenders may limit the number of buy to let mortgages you can have with them to ensure they are not overexposed if anything goes wrong).

Although it is assumed that the rental income will repay the mortgage, some lenders may require the borrower to have another source of income. This is for the any months where the property cannot be rented out; in these instances the borrower is still expected to pay the mortgage repayment as agreed.

Buy to let mortgages can be handsome investments when considered as medium to long term investments and there are many types of buy to let mortgage product, the main two being fixed rates and tracker rates.

Advantages of Buy To Let mortgages

• A buy to let mortgage can be a good investment opportunity - last year, the average return on investment was 11.4%
• In a rising property market, you will be able to take advantage of increased property values
• There are also tax advantages when securing a loan against the value of a property

Disadvantages of Buy to Let mortgages

• There is a financial risk as you are taking on another financial commitment
• If you are unable to rent the property for whatever reason, you will still need to maintain the mortgage repayments
• In a declining property market, can lose money and there may even be a risk of negative equity

Summary

• Buy to let mortgages are mortgages that allow landlords to purchase property for the purpose of letting
• Buy to let mortgages can be good investment opportunities
• There are financial risks involved as you will be taking on another financial commitment

For more information about 'Buy To Let Mortgages', you can call us on 020 8783 1337 or submit an online quote.