If you are looking for property investment opportunities, you may consider a buy to let mortgage. As with all significant financial investments, it is essential that you seek expert advice and conduct a thorough buy to let mortgage comparison. To assist with this, we have gathered together some essential facts. We’ve updated figures to reflect the changes experienced during the Covid-19 pandemic. Our outline will help you compare buy to let mortgages and seek expert advice with ease.
A buy to let mortgage may enable you to invest in the property market. You mortgage a property for the specific purpose of renting it out. You are not allowed to live at your buy to let property. If you do, you will be in breach of your lender contract and if you are caught, your lender may very well request immediate repayment of your mortgage.
The main differences between a buy to let mortgage and a residential mortgage are the size of the deposit and the nature of repayments. Most buy to let mortgages feature interest-only repayments for the duration of the contract. The bulk of the loan is repaid at the end of the contract.
There are, however, mortgages available featuring interest and capital repayments. You’ll be able to review these when you compare buy to let mortgages. For now, let’s review the way in which interest rates shape the structure of buy to let mortgages.
A standard fixed rate buy to let mortgage deal usually lasts for between two and five years. During that time, you will pay the same fixed amount as your mortgage repayment every month. You have security in knowing there will be no fluctuation in your repayments. Unfortunately, this renders you ineligible for interest rate reductions. By November 2020, most fixed rate mortgages featured rates of 3.1%.
At the end of your contract, you will automatically transfer to your lender’s standard variable interest rate (SVR) which is probably going to be far higher. You will almost certainly want to avoid this scenario. Renegotiate or find a new lender before your fixed rate mortgage expires.
As we mentioned above, this is usually a higher rate of interest subject to change whenever the lender chooses. The silver lining? You can opt out at any time for a better deal with no exit fees. The pandemic caused the Bank of England to slash the base rate twice. This resulted in the bulk of variable mortgage deals being taken off the market.
A tracker mortgage tracks above the Bank of England’s current base rate. It’s worked out as a set rate of interest, generally around 0.5-2%.
Loan-to-value ratio (LTV) an important indicator to compare buy to let mortgages
This is a crucial factor in any buy to let mortgage and influences your ability to secure a good deal. Your LTV ratio is worked out by subtracting your mortgage amount from the value of your property. Your financial advisor will explain this in more detail. Your LTV ratio determines the level of risk to your lender.
Securing a buy to let mortgage requires robust risk assessment. Lenders are looking for investors with substance. You are required to invest a significant percentage as a deposit, typically some 20-25% of the property value at the lower end of the scale. Ideally, around 40% as a deposit will yield a significantly better deal for you.
Pre-pandemic market conditions meant that there were some lenders willing to grant mortgage applications with 15% deposit. This is no longer likely to be the case. Buy to let mortgage options have thinned out considerably, with lenders understandably jittery.
The usual list of credit checks are required. Your lender will be keen to minimise any risks regarding your ability to sustain repayments, and other costs featured in a buy to let mortgage (more on these later on).
Other key lender criteria to consider as you compare buy to let mortgages include:
– You are an existing homeowner, with a solid track record of mortgage payments. You can own your home or still be paying it off.
– Your salary needs to be greater than £25k per annum.
– Your buy to let mortgage must complete before you turn 70, or in some cases 75 years of age.
There are three common stumbling blocks. The good news is these are straightforward and easy to remember when you compare buy to let mortgages. You need to review lenders’ projected rental income requirements, their borrowing limits and their LTV (loan-to-value) ratio requirements. An independent financial adviser can explain this to you as it relates to your circumstances.
There are a range of charges relating to a buy to let mortgage. It’s essential that you conduct a thorough buy to let mortgages comparison, and speak to a financial advisor. Consider these costs as essential to minimise long term risk, both for you and your lender. Additional buy to let mortgage costs include:
– Estate agent fees
– Stamp duty. Current Covid-19 rates until 31 March 2021 are 3% up to £500k and 8% up to £925k.
– Taxable rental income – talk to your financial advisor, and review your options when you perform your buy to let mortgage comparison.
– Property maintenance costs
– A range of insurance premiums including rental protection insurance, landlord insurance, building insurance
– Capital gains tax – another detailed subject for your financial advisor to discuss with you, and for you to review when comparing buy to let mortgages.
There are a host of tax implications relating to a buy to let mortgage. These are best explored and reviewed when you review your buy to let mortgages comparison results. A financial advisor can break down the relevant elements and explain how it all works. As always, conduct your own research, make your own buy to let mortgages comparison and always seek appropriate professional advice.