Buy to let mortgages: a beginner’s guide
Buy to let mortgages are designed specifically for landlords who buy properties in order to rent them out. In most cases, the rent revenue is used to meet the mortgage repayment, essentially breaking even in payment terms, but buying a property very cheaply in the long run. Buy to let mortgages are a relatively new mortgage product, having only been introduced in the mid-1990s, but are extremely popular and contributed to the massive boom in house prices.
There are a number of aspects that set buy to let mortgages apart from standard mortgages. The interest rates on a buy to let mortgage are likely to be higher, and a buy to let lender is likely to lend 80 per cent of the value of the property to the borrower. A buy to let mortgage, in order to make a realistic and fair deal, is based on the projected income from the rent charged to the tenants, rather than the borrower’s own personal income, and normally, lenders require rental incomes to be 130 per cent of the calculated interest repayment, although some are now offering deals where they require between 100 and 120 per cent.
Different types of buy to let mortgage
There are commonly three different types of buy to let mortgages, each of which offers different advantages to a range of borrowers. Most high street banks and building societies offer some buy to let products, but it is always advisable to use and independent mortgage broker to survey the whole market and find which lender, and which type of buy to let mortgage, best meets with your needs.
The most traditional type of buy to let mortgage is the repayment mortgage. This guarantees that you will own the property outright at the end of the term, as long as you have met with all of the payments. In the initial years of the mortgage, virtually all of your payments go towards interest, with a small amount going to the capital repayment. Later on, in the latter years of the mortgage term, you pay off more of the principal amount than the interest in your monthly payments, which continues until the end of the term.
Next, there is the interest-only buy to let mortgage. This is very straightforward; you simply pay off the interest on the amount you have borrowed, meaning that, at the end of the mortgage term, you must still pay off the principal amount. This means that you will need to either sell the property to make the final payment, or release equity from elsewhere (a savings plan or a pension scheme, for example). This kind of mortgage is advantageous if you are looking for lower monthly payments.
Finally, there is the mixed buy to let mortgage. This, as the name suggests, is a mixture of the previous two types of mortgage. In each monthly payment, you pay some of the interest, and some of the principal amount. So, your monthly payment is made up of the amount due on the interest charged for the entire amount borrowed, as well as the amount owed on the principal or capital repayment. This too can suit your requirements, particularly if you are worried by a large payment at the end of the mortgage term, but are looking for slightly cheaper monthly payments.
