Despite the recent economic downturn and the fall in house prices, buy to let mortgages are still widely popular in the UK housing market. This type of mortgage can be a sound investment if you have done your research properly, but it is crucial to know which kind of tenants you are aiming to attract and tailoring your buying decisions accordingly to get the best returns. Buy to let mortgages are distinct products, different in many ways from standard residential home mortgage loans, and if you are a wannabe investor you will want to know the kind to hand before approaching a buy to let lender.
The goal of this article is to explain the buy to let mortgage basics, why buy to let mortgages are so popular, and to explore the different types of mortgages specific for buy to let investors.
Why Buy to Let Mortgages are Popular
In the UK, buy to let mortgages are increasingly common for several reasons. Comparatively, it is a good investment. The stock market fluctuates and it can be incredibly risky. However, with the population growth, steadily high divorce rates, and an increasing number of university students, there is plenty of demand for rental properties. With good to excellent credit, you can find low interest rates on buy to let mortgages. Buy to let mortgages are competitive and specifically designed for landlords.
Types of Buy to Let Mortgages
Historically, buy to let mortgages required variable interest rates. Fluctuations in the market could raise or lower monthly payments. Most investors appreciate knowing how much their mortgage payment is every month because it affects how much the landlord should charge per rental. Luckily, variable interest rates are in the past, and nowadays, you can find buy to let mortgages with fixed rates, flexible rates, and interest only. By understanding buy to let mortgage basics, an investor can determine which type of mortgage best fits their property investment plan.
What is an interest only mortgage
Fixed and variable rates can be paired with an interest only mortgage. This means that buy to let investors can simply pay off the interest owed to lender. Once the property is sold, the remaining capital will be repaid. Interest only mortgages allow for lower payments while the investor makes money off of the appreciation of the property.
By obtaining an interest only mortgage, buy to let owners are able to make smaller payment initially. This is a great option for people who are looking for long-term investments. Over time, property values can increase and your investment can pay for itself. Do bear in mind that there is considerably more risk involved in choosing this option. As we have seen from the recent property crash, house prices can be volatile, and relying on your property alone as an investment for the future is therefore not advisable.
How Much Can I Borrow?
Typically a property investor will need a down payment of approximately 30-40 per cent, so the bigger deposit you have increases the amount of money you can borrow. Lenders also usually insist that the rental price covers anywhere from 100% -125% of your buy to let mortgage payment. The reason why lenders take into account rental prices is to protect their repayments when the property is not being rented out.
There are professional landlords or investors that own several or even hundreds of properties, and there are amateur landlords that only own one or two pieces of property. Regardless of which category you fall into, the basic principles are the same. Landlords need to know what their legal responsibilities are, and how their property investment affects their tax position. These responsibilities are critical, and as a landlord, you are legally bound to accept these responsibilities when renting out properties.
Where can I get a Buy to let Mortgage?
Since there is a growing trend of investors obtaining buy to let mortgages in the UK, there are a number of lenders that can offer you a mortgage to fit your specific needs. To be connected to a qualified buy to let mortgage adviser, simply fill out our short buy to let mortgage form and an adviser from the SimpyFinance network will be in touch shortly to talk you through your options.