If you’re buying a property to let out and can’t afford to buy outright, you’ll need a buy-to-let mortgage.
These mortgages work in the same way as standard mortgages, but with some key differences.
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Here are some key characteristics of buy-to-let deals you should know about:
Rates are typically 1% to 1.5% higher than standard rates on fixed and tracker deals, as there is a greater risk to the lender.
This is because landlords typically rely on rent from tenants to meet mortgage costs, so if there are vacant or ‘void’ periods, there is a risk repayment won’t be met.
Did you know that your credit report can affect the interest rate you pay?
Buy-to-let mortgages are generally interest-only, so you’re not repaying the capital debt. While this means lower monthly payments, you’ll need to find a way to pay off the original loan at the end of the agreement.
Are you sitting on an interest-only mortgage time bomb?
Usually, you’ll have to put down a bigger deposit than you would have to with a standard mortgage, at around 25%.
If you were buying a home to live in, you may be able to put down as little as 5%. Some lenders might want 20%, some 40%, so check the conditions for the deal carefully. However, the best deals will be at loan-to-values of 60% and below.
Did you know that it is sometimes harder for the over-50s to get a mortgage? Read more.
A best-buy buy-to-let deal may come with a hefty fee of as much as 2.5% of the loan, amounting to £2,500 on a £100,000 mortgage.
However, deals with higher interest rates will typically charge less. Make sure to check the total cost of a loan carefully, as some fees mean that opting for a higher interest rate might be a better bet.
How much you can borrow
The level of rent you’ll receive is also taken into account when assessing how much you can borrow, alongside affordability.
This income should typically amount to between 25% and 30% more than your monthly mortgage repayments.
How to become a landlord
Most of the major banks and building societies offer buy-to-let mortgages, but a number of specialist lenders provide them too. Make sure to compare rates from all providers as they vary widely. Speaking to a broker should give you a wide choice of deals.
There may be certain conditions included in the deal, such as not being able to let the property to groups of unconnected tenants, or the type and length of agreement you have with them.
Make sure to read the fine print before signing up.
There are some tax advantages to buy-to-let deals. You can offset interest payments on your mortgage against tax on rental income, along with other expenses such as agents' fees and maintenance costs.
If you are planning to apply for a mortgage, it is a good idea to check your credit report. Get free access to your credit report for 30 days with Experian*.
An increasing number of the over-50s are investing in rental property. Known as ‘grandlords’, they are turning to the rental and the buy-to-let markets to supplement their retirement income. For more information about becoming a landlord, download our free guide.
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