Buy-To-Let mortgages for people contracting are once again growing in popularity as the economy shows the first signs of recovery and people look to invest their money once again. But with banks and building societies still offering measly returns on savings, people are once again looking to property as a relatively safe (the credit crisis having shown that even property can bring losses too) but profitable places to invest their money. But what exactly is buy-to-let and what are buy-to-let mortgages?
Most people understand that buy to let properties are properties that people purchase in order to let out to tenants and to treat as investment vehicles. Normally, people will buy a property with a mortgage and then rent it out for a number of years in order to pay off the mortgage and eventually either sell it for a profit or keep it as an investment that brings in a continuous income stream. Successful landlords will often buy more than one buy to let property and then keep adding properties as they go along until it becomes a full-time business managing all of their properties and the incomes they produce. A buy-to-let mortgage is a mortgage specifically underwritten for such property investments and designed to operate in a slightly different way to regular high street mortgages for properties that will be lived in as homes.
Criteria for Buy-To-Let Mortgages
That said, to all intents and purposes buy to let mortgages are the same as regular high street mortgages. They are designed to work the same way and built around the same kind of underwriting with the same kind of repayment options and the same kind of rules. Where they differ is the criteria they apply when it comes to eligibility and the amount of money that people can borrow for the mortgage. Buy to let mortgages differ from regular mortgages on criteria such as affordability because they are calculated not on how much an applicant can borrow or afford to pay back on their salary, but rather on what they can bring in as an investment and the viability of the property as an investment. Buy to let mortgages are also more regularly taken out as interest-only mortgages rather than repayment mortgages, thereby allowing the investor to either take the money as income or to repay the capital and then receive surplus rental income.
The Cost of Buy-To-Let Mortgages
Another difference in buy to let mortgages is that they can often cost more than regular mortgages and it is important for people to bare this in mind when calculating their potential profits and income streams. Buy to let mortgages cost more to set up, with both the set-up fees and the rates offered being significantly more expensive.
Loan to Value Ratio
They also require a higher Loan to Value ratio than standard high street mortgages. For a long time after the housing bubble burst and the credit crisis caused banks to tighten their criteria banks were asking for much larger deposits on all mortgages. Now however, the 95% mortgages are once again being offered (though still less often than before) and most people will be able to get a mortgage with a 10% or 15% deposit. Not so when it comes to buy to let. For investment mortgages such as these the banks ask for a minimum of 25% deposit. That means that a £200,000 house will require a minimum deposit of £50,000. This mortgage cap of 75% is often prohibitive for most people, but bearing in mind what happened with the housing bubble it is no bad thing. Putting a significant deposit down on a property normally means the investment has a better chance of working out as the smaller mortgage, the higher the profits will be from the rental income. Often the bank will also offer better rates to people who put larger deposits as their risks are greatly reduced. Finally, it is also worth noting that the government’s help to buy scheme expressly excludes people wanting money for buy to let mortgages.
Different Kinds of Buy-to-Let Mortgages
There are of course different types of buy to let mortgage that people can sign up to. Along with the difference between interest only and repayment mortgages mentioned above there are also the variations in rates that people can choose from, such as Fixed Rates or Tracker Rates. Which type of rate people choose often comes down to whether they want to take a slight gamble or whether they would rather have some security. Those people who favour security will inevitably opt for a fixed rate, (often for five years) so that they know exactly how much they need to pay back every month and they are secure in the knowledge that this will not change for the next few years. The rates may drop and they may lose out but on the other hand they may go up and their decision to fix the rates will then appear prudent. Tracker rates on the other hand are often priced a bit lower at the start, as the lender knows that if costs and rates increase later they will be able to pass on those extras to the borrower, which they cannot do with fixed rates. If the interest rates drop further, tracker mortgages will prove worthwhile. If, however they go up, then they will be more expensive than fixed rates. Mortgage rates are very low at the moment and may well be for the foreseeable future so it is potentially worth fixing them at the moment (though it is important to discuss this decision with a mortgage broker or financial advisor). Lenders are currently taking advantage of the government ‘funding for lending’ scheme that funds those institutions at a low .75% rate and this scheme lasts until mid way through 2015 so for now at least rates should remain low.
Do The Research
In then end, it is always worth doing a serious amount of research before committing to a buy-to-let mortgage and before deciding on which type of mortgage to opt for. This involves shopping around, doing your research in books and on financial forums and sitting down and comparing the various mortgages you come across. Some buy to let mortgages will look great but the small print will show they come with high fees or charge a percentage of the loan amount to set them up. If you have a larger mortgage you might be better with a fixed fee – if you are getting a smaller mortgage the percentage route might be better. Look out for deals on free legal services and free valuations that companies might be offering. Buy to let valuations can often cost significantly more than standard high street ones so deals that offer free valuations are worth considering. However, be cautious if they want to tie you into one legal firm or solicitor as they might in turn have much higher charges. In other words, when weighing all these things up, remember to consider all these factors and weigh up the whole deal, not just the bits on the brochure!
Remember to Talk to Your Accountant
Buying property to let out will of course affect your tax return in a number of ways so it is always worth discussing it with your accountant first. For more information about tax issues around buy to let, have a look at HMRC’s buy to let guide here. (https://www.gov.uk/renting-out-a-property/paying-tax)
If you have been declined, remember there’s many lenders out there that have very different criteria and who may be able to offer you the mortgage you need. So don’t give up!