What are Buy to Let mortgages and how do they work?
There are several variations between Buy to Let mortgages and normal mortgages.
Interest rates for BTL mortgages are often higher (particularly in the case of Ltd Co BTLs), and the minimum required deposit for a house is often 25% (but this can range from 20% to 40% depending on the lender and the type of property). Mortgage arrangement fees are also typically be higher.
The majority of BTL mortgages offered by lenders are interest only, which means you only pay interest on the lump sum of the amount borrowed and repay the balance at the end of the term. Whilst you always have the option to pay off capital as well as interest, most landlords prefer to minimise their contractual commitment to the bank by having as low monthly payments as possible.
If you don’t already own a house or have an existing mortgage on a property, it is more difficult to secure a BTL mortgage.
Most BTL lenders focus heavily on the rental income (or likely rental income) rather than the income of the property of the applicant. Whilst every lender works differently, as a general rule of thumb: work out 7-8% of the mortgage amount you’re looking to borrow. If this figure is lower than the annual expected rental income, then the mortgage is likely to be affordable.
Is it wise to invest in buy-to-let properties?
Investing in a BTL property can be a great investment. Similarly to stocks and shares, you can receive rental income (the equivalent of dividend), there is also the opportunity for benefit from capital growth if the value of the property increases over time. Unlike stocks and shares however, you have much greater control over the investment, such as modernising and efficiently leasing the property, all of which can impact how the property’s value increases.
However, it is important to remember that most landlords will not make a large profits from rental income only; it is a long-term investment that is often realised through the sale of the property as its value rises over time. However, given the turbulence in the housing market since the subprime crisis, investors should be mindful that the value of a house might fall as well.
Other expenditures, such as Landlord Insurance and basic upkeep, must be considered as a landlord.
