Property development is big business these days and with pension funds and savings accounts performing at an all-time low, thousands of people are jumping on the buy to let bandwagon in an attempt to boost their savings or create a decent retirement income. But if you are new to the buy to let rental market, what is the difference between a regular residential mortgage and a buy to let mortgage?
Becoming a Landlord
People end up as landlords for all kinds of different reasons. Some see the rental market as an excellent way of making money, whereas others turn into an accidental landlord when they inherit a property or set up home with a partner and let theirs out. But whatever your reason for becoming a landlord, unless you have a large amount of cash sitting in a savings account, you will need a buy to let mortgage if you want to buy an investment property or let out an existing one that is already mortgaged.
How Do Buy To Let Mortgages Differ From Regular Mortgages?
In many ways a buy to let mortgage is very similar to a regular mortgage: the lender lends you money and you purchase a property. However, there are a few key differences that you need to be aware of or you could end up seeing your dreams of becoming a landlord going up in smoke very quickly.
• Fees – expect to pay higher fees for a buy to let mortgage than those typically charged on a regular mortgage.
• Interest rates – lenders have different offers available at different times, but in general, interest rates on buy to let mortgages are typically higher than residential mortgages.
• Income assessment – because a buy to let mortgage is tied to rental income, lenders will judge affordability based on the anticipated rental income for the property. The rent needs to be at least 125% higher than the monthly mortgage payment and irrespective of what you hope you can achieve in rent, a surveyor will verify the current rental value of the property during the mortgage valuation.
What Are The Lending Criteria For A Buy To Let Mortgage?
Lenders have different lending criteria for buy to let mortgages. Before the property market crashed, it was possible to borrow 100% of the purchase price of a property via a regular mortgage. Nowadays the situation is very different and most lenders expect a minimum 20% deposit before they will consider lending you a penny. Unfortunately it isn’t any different with a buy to let mortgage and lenders typically ask for an absolute minimum of a 20% deposit—and in many cases, borrowers need an even larger deposit.
Is It Easy To Obtain A Buy To Let Mortgage?
In the current economic conditions, it is not easy obtaining any kind of loan from a lender, especially mortgages, so don’t expect to walk into your local bank and walk back out with a mortgage offer. However, the rental market is booming at the moment and lenders are not oblivious to this state of affairs, so there are some good deals to be had as long as you have enough cash to put forward as a deposit and your property is capable of generating enough rental income to cover the mortgage repayments.
Other Sticking Points
Some lenders are very fussy about the type of rental property they are willing to consider for a buy to let mortgage. New build properties are a prime example of this, as a lot of lenders see them as a risky proposition in today’s challenging property market. Your age might also be another sticking point – older borrowers are often unfairly discriminated against when applying for mortgages, so bear this mind if you are hoping to use a rental property to boost your retirement income.
Where Should I Look For A Buy To Let Mortgage?
Some of the big high street lenders have separate departments for this type of mortgage, so you may be able to apply for a buy to let mortgage from your local bank. However, there are some lenders who only operate through mortgage brokers, so it may be worth visiting a broker and seeing what kind of deals they can find on your behalf. But whatever route you opt to take, do your research and make sure you are fully aware of all the terms and conditions before you make an application.
What If I Want To Let Out My Current Home?
If your property is mortgaged, you will need to inform your lender before letting it out. Many mortgages have clauses written into the terms and conditions stating that the property must not be let out to a third party, so if you subsequently do let out the property, you will be in breach of these terms and conditions. Your lender may switch you to a buy to let mortgage deal if you want to let the property out, but it will probably be more expensive. The alternative is to remortgage with another lender in order to secure a better deal.
Other Things To Think About
Finding the right buy to let mortgage is not the only thing you need to worry about before becoming a landlord – there are numerous other costs involved. Will you be able to afford the mortgage repayments if your property is empty for a few months? You will also need to factor in the cost of maintenance, insurance and letting agent fees (should you decide to use one).
John recently received a large payout from www.hardwickmissoldmortgages.co.uk and he used his windfall as a deposit for a buy to let mortgage. He already has a tenant installed and he hopes that the extra income from his property will make his pension go a bit further.