At iam mortgages, we offer our customers expert advice on buy to let mortgages, answering any questions you may have so that you can make the right mortgage decision for your circumstances. If you’re renting property as a landlord, you’ll need to take out a buy to let mortgage rather than a residential mortgage. This type of mortgage is designed for those people who are renting out a property to tenants.
You’ll need a buy to let mortgage if you’re buying a property to let to someone else, as standard residential mortgages only cover owner-occupiers of a property. If you take out a residential mortgage on a property and rent it to a third party, you’re likely to be in breach of your contract with the mortgage lender and could face hefty fines or a bill for the full amount of your loan.
If you buy a property to live in yourself but your living situation changes and you decide to rent out that property to someone else, you should let your mortgage lender know as soon as possible, as you may be able to keep your current mortgage plan in place whilst letting out the property. Bear in mind that you may be responsible for administration fees as a result.
If you are renting to friends or family, you will still require a buy to let mortgage. Many mortgage lenders are not in favour of family rentals, so your terms and conditions on your mortgage plan may change. You should seek guidance from a mortgage advisor such as a member of our team at iam mortgages if this is something you wish to pursue
What are the differences between a buy to let mortgage and a standard residential mortgage?
There are some crucial differences between these two types of mortgage, even though you are technically still borrowing money from a mortgage lender. The rates for buy to let mortgages tend to be higher in comparison to standard residential mortgages. This means you will also need to put down a larger sum of money for your deposit on a property. Buy to let mortgages are also usually interest-only, so you do not have to pay back the full amount that you owe until the mortgage term ends. A positive side to this is that your monthly payments will be low as you are only paying the interest, but if house prices drop while you are renting the property, you may not have enough money to pay off the remaining lump sum of the mortgage when you try to sell the property. You are able to claim tax relief on your mortgage interest payments – the flat rate for this is 20%.
There are several reasons why you should not take out a standard residential mortgage when letting a property:
- Your mortgage lender could discover you are not using a buy to let mortgage, and may impose heavy financial penalties or switch you to a buy to let mortgage with a higher rate.
- The insurance for the property would be invalid, so you’d be unable to claim for any damage.
- Renting a property is seen as a business transaction, from which income is made.
The amount that you can borrow for a buy to let mortgage is usually determined by the estimated rental yield. Rental income is at least 30% more than an average monthly standard residential mortgage payment. To take out a buy to let mortgage, you need to put down a deposit on the property you intend to rent of 25% or more, so the more you can put down on a property, the more likely you are to be eligible for a buy to let plan. You must also currently own another property with a 12-month history of hassle-free regular mortgage payments. It is also worth considering that arrangement fees are higher for buy to let mortgages, and you can pay up to £5,000, along with higher interest rates. You also cannot claim for compensation if your mortgage deal has been mis-sold to you. If you require further help and information on fees associated with buy to let mortgages, contact us today using our simple iam mortgages enquiry form.
How much am I able to borrow on a buy to let mortgage?
A lender will examine the prospective amounts you intend to make from the rent you receive when determining the amount you can borrow. Generally, most lenders will expect the rental income to be around 125% of the mortgage sum. For instance, if the property you’re buying is expected to cost you £12,000 per annum in mortgage interest, a lender will require you to make £15,000 per annum in rental income to satisfy their criteria. Some lenders will also require you to satisfy criteria based on your current income, like a standard residential mortgage. This is because you may have some periods of time when you are not renting out the property (void periods) and will still need to continue with mortgage payments. If you need more clarification on exactly how much you can borrow on a buy to let mortgage, fill in our iam mortgages enquiry form and we will get back to you.
What buy to let mortgage deals are available to me?
There are many different buy to let mortgages to choose from. The right one for you will depend on your circumstances. Some lower rate buy to let mortgages offer tracker rates which track the base rate of the Bank of England. There are advantages to this in that base rates are currently low, but the downside is that the mortgage rate could go up should the base rate also increase. Other types of buy to let mortgages include:
- Discounted buy to let (where the lender offers a discount off of its standard variable rate).
- Capped buy to let (where rates can rise, but are capped at a certain point).
- Fixed rate buy to let (where rates are fixed for a set period of time).
Just like a standard residential mortgage, it is good to know when you are getting the best rate. Buy to let mortgage deals typically only last 3-5 years, so it is important to remortgage to another deal to avoid being automatically put onto a standard variable rate, which can prove more expensive. Remortgaging can also be useful if you require a cash lump sum to carry out renovation work on your property.
If you’re thinking of comparing buy to let mortgages and want to find the best deals, speak to our friendly team of experts at iam mortgages. Our easy comparison service can help you get the best rate for your circumstances. Just submit an enquiry to iam mortgages using our simple form.