Types of Buy to Let Mortgages
Buy to let mortgages are relatively new financial products, introduced onto the market in the mid-1990s. These mortgages allow a person to purchase a house or flat with the intention of letting it. A buy-to-let mortgage allows you to obtain the financing needed to buy the property based on the rental income rather than your actual personal income.
It will be relatively easy for you to arrange the mortgage; as long as the projected rental income is greater than 130% of the calculated interest payment, you can purchase the property. In recent months, lenders have relaxed their lending criteria, and have approved mortgages for 110% or even 100% of the monthly payments. However, there may be higher arrangement fees or interest rates imposed in exchange for the reduced rental cover.
The best buy-to-let mortgage for you will depend on many factors, specially the size of the deposit and the purchase price. The deposit level added to the amount you are willing to borrow dictates the maximum purchase price.
It is important to calculate the maximum purchase price so you know what you can afford to buy and then determine the realistic monthly rent that you can achieve. There is no point looking at a property that will not attract sufficient rental income to at least cover your out goings.
Loan To Value
Lenders will have a loan to value (LTV) requirement that stipulates the amount required as a deposit against the purchase price of the property. Most lenders require at least a 10% deposit and often require 15% or more. A 15% deposit results in an LTV of 85%. IN general the larger the deposit that you provide (creating a lower LTV), the lower the risk for the lenders and the better the mortgage deal you will be able to negotiate.
If you ready to arrange a buy to let mortgage, there are three primary options in repaying the loan: repayment mortgage, interest-only mortgage, or a mixed interest and repayment mortgage.
Repayment Buy To Let Mortgages
Repayment mortgage payments consist of an amount that goes to interest payments and an amount to cover a fraction of the capital. This means that at the end of the term all the capital elements of the mortgage will be paid off so you own the property outright. In the early years of a mortgage, virtually all of your payments will cover interest while only a small portion will go to the principal.
For instance, on a £100,000 mortgage for 25 years with a 7.5 per cent interest rate, after ten years of monthly payments, you would still have £79,188 outstanding on your loan. It is only in the second half of the mortgage that the proportions are reversed, and applications to principal progressively increase until you finally pay off the loan at the end of the term.
A repayment mortgage is usually considered a good option if you can put down a large deposit so that the rental payments cover the larger monthly mortgage repayments that are required for a repayment mortgage. The tenants are literally buying your property for you, however be aware of tax laws which dictate that the capital repayment elements of your monthly mortgage payments cannot be reclaimed as a legitimate expense against your tax bill.
Interest-Only Buy to Let Mortgages
With this mortgage, you pay the interest only on your loan during the life of the mortgage. At the end of the term, say 25 years, you will have to pay back the principal. Borrowers usually pay this balance by either selling the property or by cashing in a savings plan — such as an endowment, pension plan, or an individual savings account (ISA) — scheduled to mature at the same time as when the mortgage balance becomes due. This option assures you of the lowest monthly payment, freeing up more money for your developing your property portfolio.
Most buy to let landlords obtain interest only mortgages because the lower monthly payments mean larger loans can be taken out against the property and yet still meet the lenders mortgage to rent ratios. Using the capital gain in one property to finance the purchase of another property with an interest only mortgage is a common way of building a portfolio of buy to let properties.
Mixed Buy To Let Mortgages
This type of mortgage allows you to combine into your monthly payment an amount for part repayment and part interest-only. Your monthly payment thus consists of the amount due on interest charged for the whole loan amount, plus an amount due on capital repayment, over the agreed term. You will have to provide for a repayment vehicle, either a savings or an investment plan, to settle any outstanding balance of the loan that may remain when the mortgage matures, or sell the property.
As noted above, be careful about claiming the capital repayment elements of a mixed mortgage against your tax bill as only the mortgage interest can be claimed as a legitimate expense. The tax inspectors are cracking down on this at present so you may be caught out with a claim for under payment of tax and associated penalties.©MoneyHighStreet.com