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Buy to Let Mortgage Guide

This guide explains how buy to let mortgages work and how to source the best buy to let product for your needs.

Buy to Let Mortgage Guide

1. How buy to let mortgages work

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A buy to let mortgage is a loan from a bank or building society for the sole purpose of purchasing a property to let. The property does not need to be tenanted when you buy it however, to qualify for a buy to let mortgage it must be your intention to let it to tenants after you have purchased it. Like regular mortgages, you will be required to repay the loan with interest over an agreed period of time (the mortgage term) and it will be secured against the property. If you are unable to repay the mortgage, your lender can sell the property in order to recoup its money. However, unlike owner-occupier mortgages the amount your mortgage provider will lend you will be dependent on your expected rental income, rather than your personal income.

2. Mortgage advice

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Unless you know exactly what buy to let mortgage product you require, you should seek professional advice.

Direct advice from a mortgage lender differs substantially from that you receive from mortgage advisers, brokers or Independent Financial Advisers (IFAs).

Mortgage lenders only offer information on their own products.

Mortgage brokers and IFAs can offer advice on a range of buy to let products from a variety of lenders, however, it should be noted that some will cover the whole of the market, others will only advise on products from a limited number of lenders.

Many mortgage brokers have relationships with lenders and at times are able to access competitive exclusive products that aren't available directly from the lender.

When looking for buy to let mortgage advice you should consider whether you are willing to pay an advice fee. Some brokers are paid commission by a lender for selling their products, others will charge an advice fee.

3. How much to borrow

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Most buy to let investors purchase a property using a combination of their own money (the deposit) and borrowed funds (the mortgage).

To calculate how much money you can comfortably borrow, a professional mortgage adviser will assess the potential rental income you are expected to receive from your investment property, the amount of deposit and your individual circumstances. They will then provide guidance on how much you can comfortably afford to borrow.

A professional adviser (and most lenders) will recommend or require that your rental income is substantially more than your monthly mortgage payment. This will ensure that you have a surplus income each month that can be used to meet maintenance costs, service charges and potential rental voids.

The amount your mortgage provider will lend depends on:

  • The expected rental income on the property you wish to buy.
  • The size of your deposit.
  • The mortgage rate of the product.

As with any property purchase there are several other significant costs that you will need to account for when investing in property, read our buying property guide in our buyer’s area for further information.

4. Repayment methods

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There are a number of repayment options when taking out a buy to let mortgage.

Repayment:

In this instance you actively pay back the loan over the mortgage term. Your monthly repayments consist of repaying the capital along with the interest accrued.

Interest only:

In this instance you do not pay back the loan over the mortgage term. Your monthly payments consist only of the interest charges. Your monthly payments will be lower; however, you must arrange an alternative way to repay the loan. Due to the fact that landlords are not required to pay tax on mortgage interest payments, many landlords opt for interest only mortgages.

Part repayment, part interest only:

In this instance part of the loan is repaid on a repayment basis and the remainder is paid on an interest only basis.

5. Types of mortgage

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Fixed rate mortgage:

In this instance the interest rate, and therefore the monthly payment, remains fixed for a specific period of time. You will generally be required to pay the lender's standard variable rate at the end of the fixed period.

Tracker mortgage:

In this instance the interest rate changes in line with the Bank of England Base Rate (BBR) or some other rate specified when the loan is agreed.

Discount mortgage:

In this instance the lender offers a discount on the Standard Variable Rate (SVR) for a specific period of time. The borrower's payments could go up and down in line with the SVR.

Standard variable rate:

The lender's Standard Variable Rate (SVR) usually forms the basis from which many of the lender's other products are calculated. The lender's SVR usually kicks in at the end of a discount or fixed deal period.

Variable rate:

With a variable rate loan, the interest rate is a set amount above or below BBR or some other base rate, and always 'tracks' changes in that rate.

Capped mortgage:

The mortgage interest rate and monthly payments are variable, however, they are guaranteed not to go above a set level (the ‘cap') during the deal period.

Collared mortgage:

Payments are variable but will not fall below a set level (the ‘collar').

6. Mortgage features

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Cashback - is an incentive that offers a cash sum once the mortgage has been taken out.

Free legal costs or contribution towards conveyancing costs - are product enhancements that usually require the borrower to use a firm of property conveyancers nominated by the lender.

Free valuation or refund of valuation - means that either, no up-front valuation fee is required from the borrower, or the lender provides a refund of the valuation fee when the mortgage application completes.

No early repayment charge - means that the mortgage scheme will allow you to repay the loan in full, at any time, without having to pay a penalty.

No overhang - means that the mortgage scheme will allow you to repay the loan without penalty once the benefit period has ended.

7. Fees and charges

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When organising a mortgage you must also bear in mind the additional fees and charges that will also be associated with arranging the loan:

Valuation fee - is the amount charged to carry out a valuation of the property on behalf of the lender. Valuations should not be confused with homebuyer's reports or surveys as these are much more detailed and are carried out on behalf of the borrower rather than the lender.

Booking fee and arrangement fee - these are up-front fees charged at the outset of the mortgage. The booking fee is paid to reserve funds on a mortgage product and is often non-refundable. The arrangement fee is typically charged on completion and can often be added to the overall mortgage sum.

Legal fees - are payable to the solicitor acting on behalf of the borrower and the lender. The cost is greater for purchase than remortgage.

Early repayment charges - only become payable if an applicant makes an overpayment or pays off the mortgage early.

Speak to our mortgage consultants for more information on buy to let mortgages.

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