Why choose to become a landlord?
House prices are rising again and buying your first home can seem a daunting challenge. Saving for a deposit and getting a mortgage the right mortgage deal agreed can be tricky enough although that’s just the start of it.
Low interest rates and ultimately low returns on your personal savings accounts and an unstable and unpredictable stock market have increased the attractions of owning a buy-to-let property as an investment option. Some landlords are building there buy to let portfolio in order to act as a weekly income in retirement to subside there anticipated pension incomes. Landlords in many parts of the country continue to enjoy increasing demand from tenants, who are struggling to afford a deposit on their first home and remaining in the rented sector of the market. The Buy to let mortgage market is now seeing competitive mortgage rates as lenders compete for business which in turn adds an extra shine to the buy-to-let investment proposition.
What deposit do I need for a buy-to-let mortgage?
A buy-to-let mortgage is very similar in many ways to that of a standard residential mortgage. Despite the similarities, there are some important differences such as the interest rate is normally higher and you will also have to put down a bigger deposit on a buy-to-let property - a minimum of 20% is the norm, although some lenders will consider a 15% deposit.
Residential Mortgage vs. Buy to let mortgage
If you are thinking of becoming a landlord and buying your first property to let, the mortgage is one of the most important considerations. You cannot take out a residential mortgage as you would normally when choosing your mortgage for your home. The more appropriate mortgage is that of a buy to let mortgage which many banks and building societies offer specifically for landlords.
Affordability and Rental income considerations
Banks and building societies will assess your personal income when they are calculating how much you can borrow on a residential mortgage. With a buy-to-let loan, they look at the anticipated rental income - and most lenders insist that the annual rental income must at least equal 125% of the monthly mortgage payment on an interest only basis. So, if you are paying mortgage interest of £200 per month, your rental income should be at least £250 per month.
The conditions of buy to let mortgage calculations and larger deposit reflect the greater risk of buy-to-let mortgages, as the statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage.
The required rental income buffer on top of the mortgage interest allows you to prepare for a period of vacancy between tenants although we can provide you with the option of an insurance policy to protect non tenancy periods.
Choice of mortgage deals
As with a residential mortgage you can choose between a large range of mortgage deals, including fixed rate and tracker loans. Some mortgages will offer you incentives such as a free valuation and even cash back or with a buy to let re-mortgage incentives such as free legal service.
Interest-only vs. repayment mortgages
A significant number of landlords opt to arrange there buy-to-let mortgage on an interest only basis as opposed to a repayment basis. Benefit to this is that you only pay the interest each month with the aim of clearing the capital debt when the property is sold. The key advantages to an interest-only loan if you are buying a property to let is that the monthly payments are far less expensive than a repayment mortgage which allows your monthly return on the rental to be higher than had the mortgage been arranged on an repayment basis.
The downside to interest only is the lack of capital repayments to reduce your outstanding debt. The most concerning issue would be if house prices are flat or falling and therefore it raises the possibility that you won't generate enough longer term property value increase to support the full repayment of the mortgage from the proceeds of the sale.
We will find the best buy-to-let mortgage deal for you
Would-be landlords looking to buy your first rental property or experienced landlords who are in search of a buy-to-let mortgage contact us today and we can compare hundreds of deals using our unbiased, impartial, and comprehensive comparison service.
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