If you’re considering buying a property to rent out, you’ll need to apply for a buy-to-let mortgage.
Often this type of mortgage comes with higher interest rates and fees than a residential property. But why is this?
Let’s take a look.
Mortgage for property owners
If you plan to climb on the landlord property ladder, a buy-to-let mortgage is something that you’ve probably looked into. But before investing, it’s important you know what to expect when applying for this type of mortgage.
The thing is, lenders see buy-to-let lending as a higher risk than providing mortgages for residential properties. This is largely because the lender has no control over who is living in the property.
Lenders can’t ask about the tenants’ financial circumstances so they have no way of knowing whether the tenants can realistically afford their rental payments.
Why does this matter, we hear you ask. Well, with most buy-let-properties, the landlord will rely on the property’s rent to cover the mortgage payments. If your tenant doesn’t pay, or if you can’t find a tenant, can you still pay your mortgage? You’ll need to even if you don’t have a tenant, because it’s you who’s responsible for paying the mortgage.
The interest rate on a buy-to-let mortgage will vary depending on the lender, but it tends to be higher than on residential mortgages because of the added risk. Lenders want to be sure that even if interest rates increase or the property is without tenants, you’ll still afford the monthly mortgage payments.
So before investing in the rental market, you should ask yourself whether you’d struggle if your circumstances changed.
Typically, the interest rate on a buy-to-let mortgage can be between 1% and 3% more expensive than a residential mortgage.
As well as higher interest rates, you should also expect to pay more in arrangement fees, which lenders will charge to set up the mortgage. And along with these additional costs, be aware that stamp duty applied to second homes is 3% higher than the regular rate.
Calculate the risk
Lenders want to make sure you’re not overstretching your finances.
It’s for this reason they often require that landlords charge rent at 125% of the monthly mortgage repayment. This means there is 25% profit to be earned.
But as a landlord, you should bear in mind the other costs associated with renting a property, like paying for maintenance and insurance.
A mortgage provider will consider all these costs when calculating whether to lend you the amount you want. It’s important you take into account all your possible outgoings and make sure you’re still within your budget.
What about the deposit?
On top of the higher interest and charges, lenders require that you part with around 25% of the property’s value in order to secure a buy-to-let mortgage.
So before investing in this type of mortgage, you’ll need to make sure you have enough for the deposit, as well as being able to afford all the other moving costs.
"it’s worth researching whether rental properties are sought after in the area."
Consider your options
Although the interest, arrangement and deposit are higher when compared to a residential mortgage, the rental market could still be a great way of earning cash.
Before committing to a buy-to-let mortgage on a particular property, it’s worth researching whether rental properties are sought after in the area you’re planning to buy in. If it’s a high-demand area, there may be less risk of the property being vacant for long periods of time.
What will lenders look for?
As well as considering all the costs we’ve discussed above, in order to secure a buy-to-let mortgage lenders may have other requests. For example, they may require that your income is over £25,000 to ensure you have enough money coming in to cover your mortgage payments if you don’t have a tenant.
On top of this, they’ll check whether you’re a current homeowner. If you don’t already own a property, you may find it difficult to successfully apply for this type of mortgage.
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