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BTL Mortgages Explained
Btl mortgages ( buy to let ) are designed for those wanting a mortgage for the purpose of letting the property out to tenants.
These BTL mortgages have become increasingly popular over the past few years, driven by increasing house prices, a strong demand for rental properties and a drop in the interest rates available to private landlords. A wide range of btl mortgage products are now available, including fixed rate, discount, tracker and variable rates.
Btl mortgage products differ to residential mortgages in three main ways:
- Rent potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not considered.
- Interest rate - btl mortgage products have higher interest rates.
- Larger deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit for BTL mortgages.
Buy to Let Mortgages Pros and Cons
Becoming a private landlord should not be seen as an easy way of making money. It is riskier, more complicated and more time consuming than most other forms of investment and there is no guarantee that house prices will continue to rise. That said, letting a second property to tenants can reap considerable financial rewards over time.
When buying a property on a BTL Mortgage you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity in the property as it increases in value over time. The decision may affect the type of property you purchase, the location and the type of btl mortgage you take. For example, a prime city center location may be more suited to high growth.
Interest Only or Repayment mortgage ?
Repayment mortgages are the most popular form of mortgage, it is worth remembering that when budgeting your monthly payments on a repayment mortgage that the term taken at the outset can be changed in the future. Many customers are now taking repayments mortgages over 30 of even 35 years to keep their monthly repayments low in the initial years. Interest only BTL mortgage are however becoming increasingly popular for both first time landlords and experienced BTL investors. When the BTL property is not let they benefit from keeping the monthly mortgage costs to a minimum. Many BTL mortgage lenders are happy to offer interest only mortgages with no investment vehicle required.
Buy to Let Budgeting
When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 130% of the rental property's mortgage repayments (interest only) in order to cover your costs. 130% is also is also a good guide as to the required gross rental that a btl lender would be looking for when agreeing a btl mortgage. These calculations vary from lender to lender, for more information please feel free to speak to our expert btl mortgage specialists for fee free btl mortgage advice.
The additional costs for BTL include:
- Letting agency fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants and an additional cost of around 5% if you require a full management service.
- Ground rent / service charges - applicable to leasehold properties.
- Property's upkeep - maintenance costs for the property.
- Gas/electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations.
- Insurance - building insurance and content insurance for those items provided as part of the rental agreement.
- Furnishing - the purchase of any furniture if the property is to be let furnished.
- Legal insurance - to cover the costs of evicting tenants in the event of non payment.
- Decorating costs - the property may require work ranging from painting to a new bathroom suit before it is suitable to be let to tenants.
When choosing a property to let it is wise to take advice from local letting agents to determine what type of properties are in demand and in which areas. The Association of Residential Letting Agents (ARLA) state that a property 'needs to be in the right area, close to transport and other facilities, and in good condition'.
When choosing a letting agent to act on your behalf it is sensible to choose one that is a member of the ARLA. The reason is because members of the ARLA must join in a bonding scheme to protect rent and tenant's deposits. The bond provides total compensation of up to £2 million a year.
Buy to Let Taxation
There are a number of tax issues that you will need to look into before taking out a btl mortgage. In early 2016 the Government increased the stamp duty tax for buy to let properties. For more information please use the links below
There are other taxation areas that need to be explored in order to maximize your tax position, such as being able to offset your maintenance costs, letting agent fees as well as any interest paid on a buy to let mortgage against your tax.
You can visit the ARLA website at www.arla.co.uk for further information on becoming a private landlord.
These types of mortgages may not be regulated by the Financial Conduct Authority.
Do you want fee free BTL mortgage advice ?
For professional buy to let mortgage or remortgage advice please complete the mortgage enquiry form and a mortgage adviser will contact you to discuss your mortgage requirements.
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Think carefully before securing other debts against your home, your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages
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