A buy to let mortgage is sold specifically for those that intend to buy property for investment purposes. This is different to a residential mortgage as it’s intended to be let to tenants rather than for personal use.
How do buy to let mortgages work?
1. Put down a deposit
The minimum deposit for a buy to let mortgage is higher than a residential mortgage. This is typically between 20% and 25%.
2. Interest-only payments
Most investors will take out an interest-only mortgage. This is where you’ll pay the monthly interest but do not make repayments towards reducing the capital balance. Most investors prefer this option as it keeps outgoings low – and therefore retain a greater profit in their rental business.
3. Pay back the full capital
At the end of the mortgage term, you will need to pay back the mortgage balance. You will do this either through the sale of the property or some other repayment method.
What are the benefits of a buy to let mortgage
1. Rental income
With the rental market in the UK being strong, investing in rental property allows you to generate a steady stream of revenue from tenants. This provides passive income (whilst noting the property still needs to be managed).
2. Portfolio diversification
Investing in buy to let property allows you to diversify your investment portfolio and therefore spread the risk across different asset classes.
3. Capital appreciation
Generally, property value has increased in the UK. This provides potential for long term capital growth – although there is no guarantee.
4. Keeps pace with inflation
Property value and rental income generally tends to keep pace with inflation.
What are the interest rates on buy to let mortgages?
The interest rate you will get depends on a number of factors. Loan-to-value (LTV) and credit history are the driving factors here. The bigger the proportion of the property that is covered by the mortgage, the riskier the loan – i.e. in case house prices drop. Therefore, lenders will charge a higher interest rate. In terms of credit history, lenders assess your credit worthiness and affordability to determine the risk involved. The poorer your credit history, the greater the risk involved and therefore results in a higher interest rate.
Other the factors that impact on rates are market conditions i.e. changes in the base rate may result in higher interest rates, and the type of mortgage deal you have. If you have a fixed rate mortgage, any fluctuations in the market would not impact your monthly payments. This is however not the case if you have a variable rate or tracker mortgage.
