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.