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What is a buy-to-let mortgage?

how does a buy to let mortgage work

What is a Buy-to-Let Mortgage?

Buying a property to rent out can be an excellent way to generate an income for the present and invest for the future. But if you can’t afford to buy outright, you will need a buy-to-let mortgage rather than a conventional mortgage.

What is a buy-to-let mortgage?

As is obvious from the name, buy-to-let mortgages are for homes that you buy to let out. They work in the same way as standard mortgages, although rates are higher, typically by around 1% or 1.5%, as there is a greater risk to the lender. This is because landlords usually rely on rent from their tenants to cover their mortgage costs, and, if there is a long period when they don’t have a tenant, usually known as a ‘void’ period, there is a risk of them defaulting on the mortgage.

You also usually have to put down a bigger deposit than you would have to with a standard mortgage, typically around 25%, whereas if you were buying a home to live in, you can put down as little as 5%.

However, never be tempted to opt for a standard mortgage and then rent the property out, as you will effectively be committing mortgage fraud. If the lender finds out they could withdraw any special rate you might have been on, change the terms and conditions of your mortgage or even refuse to continue lending to you.

Bear in mind that you are unlikely to be offered a buy-to-let mortgage unless you already own your own home, and some lenders also have a minimum income requirement, so you may struggle to get one if you earn less than around £25,000 a year.

Never be

tempted to opt for a standard mortgage and then rent the property out, as you will effectively be committing mortgage fraud.

How much can I borrow?

With standard mortgages, the amount you can borrow is linked to your income, so you can usually borrow around three times’ your salary, although this will vary depending on which lender you go to.

But on top of this, when you take out a buy-to-let mortgage, the amount you can borrow is also linked to the level of rent your property is likely to generate. Usually the rental income must equate to a sum that is between 25% and 30% higher than your monthly mortgage repayments. This is calculated on an interest-only basis however which is how buy-to-let mortgages tend to be offered.

If you aren’t certain what sort of rent any property you are interested in might generate, contact lettings agents in the area and ask how much you might be able to charge. It’s also worth scouring local property magazines and newspapers to give you an idea of the sort of rents similar properties command.

Compare rates

Most of the major banks and building societies offer buy-to-let mortgages, and a number of specialist lenders provide them too. But never just opt for the first buy-to-let mortgage you find, as rates vary widely and you may be able to find a much cheaper deal elsewhere.

Always compare several different deals before applying and, if you’re uncertain, speak to a specialist buy-to-let mortgage broker to ensure you find the right deal to suit you. Remember to check any arrangement fees too, as these can add substantially to the overall cost of any mortgage deal.

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