Choosing The Right Buy-To-Let Mortgage
Buy-to-let took off during the 1990s with the increasing availability of specialist mortgages tailored towards the sector.
For most people investing in buy-to-let schemes, mortgages are a vital component for funding the investment. We consider some important issues to help you choose your mortgage.
Do not borrow more than you can afford
It is important not to overstretch yourself and put both your capital and credit rating at risk. Most lenders will not let first-time buyers take out a mortgage without satisfying themselves that the landlord can afford the repayments on top of other commitments from their regular income.
Some lenders are more prepared to provide mortgages without proof of income and based on the strength of projected income alone, making it easy for the landlord to borrow more than they can afford and leading to potential trouble if interest rates rise or tenant trouble prevents them collecting an adequate rent to cover the mortgage.
Repayment or interest only-mortgages
Landlords have a choice between repayment mortgages, where the monthly payment is calculated to pay both the interest and the capital borrowed over an agreed term or an interest-only mortgage, where the landlord only pays the interest on the mortgage each month, and at the end of the term repays the full amount borrowed in one lump sum.
Interest-only mortgages have the benefit of lower monthly repayments, but remember provisions must be made to ensure the outstanding capital will be repaid at the end of the term.
It is possible to sell the property and use this money to repay the loan, provided the property has either grown in value or at least maintained the same value since the initial purchase.
Variable or fixed rate
Lenders will offer the option of taking out a variable or fixed rate mortgage. Variable rate mortgages follow the interest rate set by the Bank of England. When interest rates rise, the interest on your mortgage repayments will rise. When interest rates fall, the interest on your mortgage repayments fall.
Tracker mortgages are a variant of variable rate mortgages and are usually set in relation to well known market standards.
Alternatively the mortgage lender may offer a fixed rate deal, where the interest rate is literally 'fixed' at an agreed amount for a certain period of time. This type of deal provides a greater level of stability to the landlord, but can be more expensive and less flexible than a variable mortgage.
It is important to remember that buy-to-let is a medium to long-term investment. Try not to be taken in by mortgage products that offer low start-up costs, but actually end up being more expensive over the longer term.
Read the small print
Buy-to-let mortgages are far more complicated than regular home buyer mortgages. It is important to check that your lender does not have restrictions on certain types of let or periods of occupancy.
Restrictions could exist for:
-- Flats above shops or offices
-- Blocks of flats
-- Student accommodation
-- Corporate lets
-- Local authority / housing association lets
Seek further advice
Before choosing a mortgage we would always recommend consulting with your financial advisor and conducting further research.
Don Suter is Managing Editor of the UK Property Portal (http://www.ukpropertyportal.co.uk), an online directory and magazine for UK property sales, rental, surveyors, mortgages, conveyancing, property insurance, removals, news, investment and development
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