Buy to let mortgages are best defined by what they’re not. They’re not residential mortgages, which lenders provide to help you buy a house to live in. Instead, buy to let mortgages provide capital to invest in property to rent out, for profit. In that sense, the stakes differ dramatically between the two types. At stake with a residential mortgage is your home, and possibly your family’s, while buy to let mortgages have profit margins on the line.
The Financial Conduct Authority regulates residential mortgages carefully to keep people off the streets. By contrast, buy to let mortgages, as purely financial business transactions, face far less fastidious rules and regulations.
The differing regulation between the two types prompts banks and lenders to view them differently, too. Buy to let mortgages, therefore, come with a variety of different criteria and policy guidelines.
How Lenders Assess Buy to Let Mortgages
Lenders assess a range of financial factors when providing residential mortgages, such as salary, spending, and credit history. The same is true of buy to let mortgages in part, yet providers focus on one factor far more than others: rental income.
Rental income takes precedent over any other factor, as it should cover mortgage repayments by itself. If the rental income covers a set percentage of the monthly mortgage, buy to let lenders are generally happy to lend. A common minimum margin is 125%, with some providers requiring 140% of monthly mortgage costs.
The extra percentage requirements are designed to cover additional costs like property maintenance and renting void periods. Both of these issues are well worth accounting for when planning to take out a buy to let mortgage. Much like residential mortgages, lenders offer better rates when provided with larger deposits.
Buy to Let Deposits
As the FCA doesn’t regulate buy to let mortgages, lenders treat them as higher risk enterprises than conventional mortgages. They generally ask for a relatively high deposit, between 20% and 50% of the property’s total value. As mentioned, higher deposits result in more profitable rates. Lenders often require handling fees for each buy to let mortgage, charged at a small percentage of the total loan. Crucially, this means that the higher the loan, the higher the fee.
After you pay the deposit, lenders agree on one of two types of mortgage plans.
1- Interest-Only Loans
With this form of buy to let mortgage, you set the capital loan to one side and only the pay the interest back each month. This, the most popular form of buy to let mortgage, keeps monthly costs to a minimum. However, when the mortgage term elapses, you’re left with a large unaccounted debt. To undertake an interest-only loan, you, therefore, need a clear plan for when the loan ends. This generally involves selling, refinancing, or paying off with funds from elsewhere.
2- Repayment Loans
These rarer forms of by to let loans involve paying off sections of the capital along with the interest each month. By the time the loan term ends, you will have paid off the whole loan, and retain full ownership of the property. This loan’s relatively low popularity stems from its lower monthly profitability than interest-only loans. However, in the long term, it provides a strengthened and expanded property portfolio, debt-free.
Both forms of buy to let loans involve some form of property ownership when the term ends, be it full or partial. They thereby depend on property markets for their long-term profitability. The British property market, though fluctuating, offers profit potentials when invested in strategically. With the right buy to let mortgage experts, you can find the right investment strategy to maximise your opportunities and your assets.
While repayment loans prove the rarer of the two, both forms saw increased popularity in recent months. Paired with a trend of increasingly favourable rates, with the average fixed rate decreasing by a percentage point over the last five years, buy to let mortgages are an opportune and in-demand service.