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Buy-to-let mortgages: Explained

Last updated: 8th October 2019

Buy-to-let mortgages can be a bit of a minefield and we’re regularly inundated with mortgage questions. It’s a topic we’ve covered a fair few times over on The Property Podcast but we thought we’d condense all the best bits here for you to read at your leisure.

So sit back as we go through everything you need to know about buy-to-let mortgages.

Who can get a buy-to-let mortgage?

First things first, before applying for a buy to let mortgage, you need to know if you qualify for one. Technically, it’s easier to get one if you’re already a homeowner or have an existing buy-to-let property, but that doesn’t mean it’s completely impossible to get one if you’re neither of the above.

Unlike a residential mortgage, the process isn’t about you personally. Your credit rating and income are still factors, but the amount you can borrow isn’t based on your income. Instead, it’s based on the property itself and what the lender thinks you’ll be able to achieve in terms of monthly rental income.

How much can you borrow with a buy-to-let mortgage?

Most people get a 75% loan-to-value (LTV) mortgage, but you can actually get mortgage rates at 80%, 85% and even higher. It’s worth being aware that there are minimal products like this though. Because they’re quite rare, and because of the risks involved, the costs are often higher than those of a lower LTV.

How much you can borrow is dependant on the value of the buy-to-let property and the predicted rental value. The quickest way to check the potential rental level of a property is to speak to a mortgage broker who can work it out quickly for you.

What kind of buy-to-let mortgage should you go for?

A big question is: do you go for an interest only buy-to-let mortgage or do you pay the capital? Most property investors choose interest only as that leaves you with more money left over each month.

Interest only mortgages mean you’ll still owe the same amount at the end of the term as you did the day you bought the property – which can seem dangerous. But because you can remortgage, this pushes the end-date further away. And you also have inflation which helps increase the value of the buy-to-let property.

Our handy (and free!) course explains this process in detail and tells you how property will make you rich in the long term. We talk you through how you can combine leverage and inflation to make debt work for you – not against you.

On the other hand, some property investors prefer to pay off the capital and be mortgage free at the end. It’s completely down to personal preference.

Purchasing a buy-to-let property in a limited company

Buying investment property through a limited company gives you different tax advantages. If you do choose to invest through a limited company, the mortgage products available are more common than a few years ago – something we covered recently when we busted 6 mortgage myths!

One common misconception about buying through a limited company are the repayments. You will still be 100% personally liable for repaying the mortgage, and there will be a credit check against you – not the company. Just food for thought.

How do you decide which buy-to-let mortgage product to go for?

When deciding what kind of buy-to-let mortgage product to go for, you should consider:

  • The type of mortgage
  • How the interest rate is set.
  • Whether you want a fixed, tracker or variable.
    • Fixed – the interest rate you pay is fixed for a period of time, usually two, three, five or occasionally ten years.
    • Tracker – changes in line with the Bank of England’s base rate.
    • Variable – the lender can change their interest rate to whatever they want, whenever they want.

The interest rate is the cost of borrowing money from the lender, so you’re going to want it to be as low as you can possibly get it. You should also be very wary of the costs and fees of some mortgage products.

But it’s not just the cost that you need to consider when choosing a buy-to-let mortgage. You need to consider the speed of getting the mortgage too. This is particularly important if you need to move quickly on a deal. If you choose a mortgage product from a lender that has a lengthy process, the deal may fall through.

The majority of the obstacles we’ve mentioned above can be overcome fairly quickly when you use a mortgage broker who is experienced with buy-to-let mortgages – which we highly recommend.

Purchasing a buy-to-let property can be slightly more complex than an owner-occupier residential purchase, so when you work with a professional, you’ll often find the process to be far easier and quicker than if you were to go it alone.

We’ve also put together a video to help explain this a bit more. You can watch it here.

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