Before the credit crunch, it used to be pretty easy to get a buy-to-let mortgage. Arrears on buy-to-let mortgages were much lower than arrears on residential mortgages, and – as long as you had a clean credit record, a 15% deposit and could attract a monthly rent that covered 125% of your monthly mortgage payments - you were sorted.
Nowadays, it is much more difficult to get a buy-to-let mortgage, especially on a new build property. Lenders require bigger deposits, typically at least 25%, and are much more cautious than in the past. The market is also less competitive now, with fewer lenders around (unfortunately, many buy-to-let specialists were also sub-prime lenders and hence have gone out of business).
This means that you will usually be charged a higher rate on a buy-to-let mortgage than you would on a residential mortgage. Even if the rate is low, the deal is likely to cost more overall, as often the best rates come with very high fees.
So how can you ensure you get the best deal?
Picking the right buy-to-let mortgage
Buy-to-let mortgages come in lots of different shapes and sizes. To find the right one for you, there are two key decisions you need to make.
- Interest-Only vs Repayment. Should you go for an interest-only or a repayment mortgage? With a repayment mortgage, you gradually pay off the original amount you borrowed over the mortgage term, so that in the end, you own the property outright. However, this means higher monthly than with an interest-only mortgage where, by contrast, you only pay the interest. This means you are likely to have to sell the property when the mortgage term is up in order to pay back the capital you borrowed. So it really has to be an investment, not a home you plan to live in.
Top tip: You can get tax relief on mortgage interest if you’re a buy-to-let landlord. Speak to an accountant for more details.
- Rental Income vs Capital Appreciation. Are you investing in buy-to-let in order to increase your monthly income or for a capital gain through an increase in the property price? Ideally, of course, you want both. However, one may be more important to you than the other. For example, if an extra monthly income is your top priority, you may wish to invest more capital and borrow less, to bring down your mortgage costs. You may also want to look for a cheap property that offers a high rental income, such as a student house, rather than a property that offers a low rental income but is likely to go up in value.
Top tip: Make sure that you have enough income to cope with void periods, when there is no one renting the property, and to pay for proper maintenance and repairs to the property.
Be wary of:
- Letting agents. Great for finding a tenant – but beware of keeping them on to manage the property. They can charge the earth (up around 15% of the rent!) and provide precious little in return. You may find you are better off with landlords’ emergency insurance, which should take care of any maintenance problems arising from the flat.
- Over-leveraging. This is when you take money out of one property to invest in another, and then do the same with the next, until you are highly exposed to the inevitable ups and downs of the market.
- Forgetting to remortgage. As with a residential mortgage, it pays to shop around and make sure you are comparing the whole of the market to find the best deals.
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