Buy-to-let mortgages are fit for landlords who want to buy a property then open the property for rental. It is like other regular mortgages, but there are differences.
The buy-to-let is working in a different way to a residential mortgage on a property you’re planning to live. It needs a bigger deposit, higher fees, and a higher rate of interest.
Typically, the buy-to-let mortgages are on an interest-only basis. It means the clearing of capital debt, which is the amount you borrow is at the end of the loan term. In contrast, the residential mortgages are the capital and interest loans as well, but the monthly payments cover the interest, portion of the credit, and the interest. Hence, in an agreed period, you will be paying the full amount gradually.
Usually, the Landlords that have a buy-to-let property will expect that the rental payments they are receiving will eventually cover the monthly mortgage payments. However, the gaps are that there are some months that rental collection could be a problem. Hence, there are also months that there are few interested tenants that will take to live and pay the rent.
So, the buy-to-let mortgage could be a higher risk for the lender. While the buy-to-let borrower also has to pay the higher costs. However, this platform has several advantages for intended purposes in the business perspective.
How can a buy-to-let be appropriate for a buyer?
There are circumstances which buy-to-let mortgage will be the most appropriate and most advantageous for your comfort and satisfaction:
- When You want to choose houses or flats that have the best location for rent or business operations
- If You have your own home whether you buy it outright or with an outstanding mortgage and potentially earn income.
- You have a good credit record and has not been stretching too much on your other debts
- If you are earning more than £25,000 annually. If you earn lesser than this figure, for sure, you will be struggling to get the approval of the lender.
Key differences of ordinary mortgages to a buy-to-let mortgage
- The fees will be likely to be considerably higher.
- Typically, the interest rates on buy-to-let mortgages are higher than rental mortgage deals.
- Usually, the minimum deposit for a buy-to-let mortgage is at 25% of the value of the property. Although, there are instances that lenders will allow between 20% to 40%.
- Most of the buy-to-let mortgages are based on interest-only. It means you do not need to pay any amount every month. However, it will be your obligation to repay the full amount of the agreed loan when the mortgage term ends. However, some lenders provide buy-to-let mortgages that can be available for repayment basis.
- Have someone to advise, facilitate, lend and administer buy-to-let mortgages under the same laws following the residential mortgages under the regulation of the Financial Conduct Authority (FCA)
- However, if the landlord will let the property to a close family member, i.e. spouse, civil partner, child, grandparent, parent or sibling, the regulatory procedures may not be a requirement from FCA.
- The non-negotiable obligation and mandate of FCA intervention will for a consumer-based buy- to- let mortgages wherein the agency follows a strict assessment and ensure following the affordability asset like in residential mortgage.
Types of buy-to-let mortgages
1. Tracker mortgages
The lender will be the one that will set the interest at a certain percentage that they will charge to the borrower. The interest rate is usually above the price Bank of England, which is volatile.
The mortgage repayments can also potentially change month-to-month depending on the base rate. If interest rates increase, the cost of your monthly mortgage repayments will also increase. In the same way, if interest rates will decrease, then the monthly mortgage repayments will also decrease.
2. Discounted variable mortgages
The lenders set a standard variable interest rate (SVR). Usually, it is set at a rate of 5%. Typically, the interest rate is set at 2% or lower a set amount below the SVR perhaps 2% lower. It makes the discounted mortgage rate be at 3%.
However, if the SVR moves, the discounted rate will follow. It can either move up or down with the discount remaining in place. So if the SVR would rise at 6%, then the discounted rate would position at 4%. Usually, the discounted rate deals will last for the last two years.
3. Fixed-rate mortgages
In fixed rate mortgage is can keep your monthly mortgage repayments at a low rate for two to five years. The lowering of payments will depend on the agreement with the mortgage providers on the package of their offers.
Nonetheless, when the end of the fixed-rate period deal will end, and you will find a new contract, they will move you to the provider’s standard variable rate that is expected to be higher.
What’s going to happen when the interest-only mortgage deal comes to an end?
At the end of the deal, you still have to pay the cost of the property purchase price since you were paying the interest. Since then, you can decide to sell the property.
Hence, if you will sell the property, the price of the property would need to increase or the same price value when you purchase.