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The Buy to Let Mortgage: All the Basics

signing a mortgage agreement

So, you want to be a landlord. If you are looking to borrow money to pay for an investment property, you could apply for a buy to let mortgage. This kind of mortgage is similar to other mortgage types, with some key features that you must be aware of before you begin seeking potential lenders.

What exactly is a buy to let mortgage?

If you are planning to lease a property, you need a buy to let mortgage, which is basically a mortgage with a buy to let deal, or get your lender to give you a consent to let. You will need to do some comparison shopping to secure the best buy to let mortgage deal. With buy to let mortgages, your interest rate could be variable or fixed, and payments could be interest-only or on a capital with interest (repayment) basis.

Can you afford it?

Potential lenders would evaluate your application based on the property’s estimated rental income or value and not your personal income. Lenders, however, would require that you have a minimum of 125% rental cover so that you could use the extra income for covering your landlord-related costs such as maintenance, insurance and yearly safety inspections, among others.

What about the interest rates and deposit?

The average deposit that lenders require for a buy to let mortgage is 25%, which is significantly higher than the average deposit for a residential mortgage. This means that if the purchase price of the property you want is £180,000, then you have to put down a £45,000 deposit. Likewise, the amount you could borrow in relation to your property’s value, which is the LTV or loan-to-value ratio, would be based on your deposit, such that your LTV would be 75% if you could put down a deposit of 25%. So, if you want the best possible rate, you need to put down a huge deposit.

What else should you know?

Whichever lender you choose to go with, make certain to read and understand all the terms and conditions. For instance, some lenders will not allow landlords to let their place to occupants on benefits, while others prohibit tenancy agreements that last for more than a year. Also, you cannot live in a property that you are funding through a buy to let mortgage; you are strictly the landlord and cannot be the tenant.

 

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