So you’re thinking of becoming a landlord? Buying a property to rent out is seen by some to be a good way to invest your money for the future, particularly if your tenants will cover the mortgage payments for you, and the property’s value increases over time.
But when you set out on buying a property with the intention of letting, you can’t take out a normal mortgage. It’s because you’re buying for investment reasons – not just to get a roof over your head. You have to get a special buy to let mortgage. The good news is that there are plenty of these available.
The main differences between a buy to let mortgage and a standard mortgage are that interest rates and the amount you need to have as a deposit are usually higher. A 25% deposit is a fairly standard requirement, but if you have a 40% deposit you should be able to get better buy to let mortgage rates. You could also find that there are high arrangement fees for this kind of mortgage.
Checking your income
Your lender will also need to check that you are in a strong financial position to ensure their investment is safe. The banks and building societies will also look at the potential income you will get from the rent.
They usually want this to cover the interest on the mortgage and more, with a rate of at least 125%. So if the interest on the mortgage will be £15,000 a year, the rent you get from tenants would typically need to be at least £18,750.
Not everyone is able to get a buy-to-let deal. There could be a minimum or maximum age, and you might need to earn over a certain amount, say £25,000.
Comparing buy–to-let mortgages
To get a better idea of how much a buy-to-let mortgage might cost you, use comparethemarket.com to do a mortgage comparison. There are a few things we will ask you about to bring you the quotes, so let’s have a quick look at these.
We’ll ask you to put in the value of the property you’re looking to buy, and how much you want to borrow (which is the property price less your deposit). This will give your “Loan to Value” (LTV) rate. It’s the amount of your money you’re borrowing compared to the overall value of the house. So, if you have a £50,000 deposit towards a £200,000 property, your deposit is worth 25% of the price of the property: the LTV is the remaining 75%. As we said earlier, the cheapest buy to let mortgage rates are often available for people with a 40% deposit or more – a 60% LTV.
Repayment or interest only?
Once you’ve put those in, it’s nearly time to compare mortgage rates. But first you need to decide if you want a repayment mortgage or an interest only mortgage. With repayment mortgages you pay off the interest and some of the overall cost of the property every month. At the end of your repayment term, you should have managed to pay for the whole house and the interest - you will own the property outright.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital (the amount you borrowed). So at the end of the term, you will own the property but the mortgage on the property will still be outstanding unless you pay the debt off another way.
Fixed or variable?
There are two main categories of mortgage: fixed or variable. Which category you opt for will depend on your personal preferences.
Variable rate mortgages could either be ‘trackers’ where the interest rate is above, below or the same rate as the Bank of England base rate, or fully variable, where your lender decides on a rate and can change this at any time (within the conditions of the product). . Other kinds of variable mortgage are available too, like capped or collared mortgages where there might be upper and lower interest rate limits. With any of these your mortgage payments could go up or down as interest rates change.
If you choose a fixed rate, your interest rate and your monthly payments are set at a certain level for an agreed length of time. These are often 2 or 3 year deals, but you can also get 5 year fixed rate mortgage. At the end of the deal you are automatically switched to another rate, usually a variable rate. But you can compare and move to another product once this has ended.
Whether you have a fixed or variable mortgage, it can be a good idea to shop around a little before your mortgage deal ends, and move to another one if it will save you money.
Read the details
So that’s a summary of how to use our mortgage finder. The offers will be in price order, based on monthly repayments. It’s easy to look at the different details of the mortgage deals to narrow down your options. But always read every detail before signing up – this is one of the most important financial products you’ll ever buy.
A final word on this kind of loan – make sure you’re aware of the risks, that you can cope if the property has no tenants for a month or two every year. And remember, rents and house prices could come down, as well as go up.