What You Need to Know About Buy-To-Let Mortgages
If you are a person who wants dreams of investing in real estate but you don’t know where to start, a buy to let mortgage may be an option for you. A buy to let mortgage is different from a regular one because it allows you to finance the property, specifically with the intent to “let” or rent it out. That’s right. Your real estate investment dreams may be more accessible than you think.
Some of the things you may be wondering are, “how do I access this mortgage?”, “what are the terms?” and “what are my payments every month”? Let’s get started on some answers.
Who would a buy to let mortgage be best for?
If you are someone who already has a mortgage and wants to enter the property market but can’t afford real estate on your own, a buy to let mortgage can give you a foothold. People who have never owned real estate, either as a holder of a residential mortgage or a landlord can also access buy to let mortgages, but the terms and rates for them are likely to be costlier. Even experienced landlords may find that the right buy to let mortgage can enhance their property portfolio. Special rules and certain restrictions apply to them though.
How do buy to let mortgages work?
With a buy to let mortgage, you can elect to pay only the interest on the sum you borrowed until the end of the term. The advantages become immediately apparent because it allows you to save the profits from your rental income while incurring minimal costs. The amount borrowed, or what is called the capital debt, becomes due at the end of the mortgage term. As you are making your interest-only payments, it is important to prepare for the day when you have to repay the borrowed balance.
What are the qualification criteria for a buy to let mortgage?
The deposit you will pay on a buy-to-let mortgage will be typically higher than a residential mortgage, anywhere between 25 – 40 percent of the property’s value. Typically, you will be someone with good credit and will have had a residential mortgage. You also have to be within a particular age range. Most mortgages must be repaid by age 70-75 and last between 25-30 years. When you buy a property to let it out, you must be young enough to pay the loan amount back in its entirety within that age band. It is to your advantage to decide to invest in real estate as early as you can manage. The rental income from your property has to be between 20-25 percent higher than your mortgage payment. When you go to your bank, you should have your research on the potential income your prospective property can fetch.
Where can I get a buy to let mortgage?
Most major banks will have a buy to let options. There are also specialist brokers.
What are some other things I should know about buy to let mortgages?
Normally, when you take a buy to let mortgage, it isn’t regulated by the Financial Conduct Authority. The FCA regulates the financial services sector to ensure consumers are treated fairly. It only monitors regular mortgages. However, if you plan to live on the rental property, or have members of your family live there, your buy to let mortgage will become subject to FCA jurisdiction, like a regular mortgage. While you may have been having visions of a profitable rental property, you should plan for slow periods. COVID 19 has been hard on landlords everywhere because with job losses mounting, many tenants have been unable to make rent.
You need to have contingencies in place in case something similar happens with your property. If you do not have rental income, you will not be able to pay your mortgage. Another scenario you should have a plan in place for is a downturn in the market. Your buy to let mortgage pays the interest off and in the end, you are left with the capital payment. If your property depreciates, you may not be able to sell it to repay. This is why you need to be prudent in the years the rentals are profitable. Market devaluations are unpredictable and you don’t want to find yourself with a large gap between what you can repay and what you owe. So, what are you waiting for? You have the information you need to decide whether a buy to let mortgage might be worth looking into. Go ahead and live those real estate investment dreams.