Many industries are on the incline ever since rules and regulations have started to relax, no more so than the property industry. With people looking to buy affordable housing and the other half looking to cash in on this, it is no surprise that we see a rise in people applying for a buy to let mortgage. However, if you don’t know about this process you should always be aware that there are risks and complications that could occur. Although there are some major similarities between buy to let mortgages and residential mortgages, there are some considerable differences. Read on to find out our guide to buying to let mortgages.
Differences
If you plan on purchasing a property and renting it out to someone then you MUST gain a buy to let mortgage. A residential mortgage is only valid if you purchase the property and live in it yourself. Buy to let mortgages are normally always more expensive, as they are seen as a higher risk investment for mortgage advisors. Usually, a buy to let mortgage will be interest only, whereas residential mortgages are capital and interest loans. This means that landlords will only interest rates per month rather than repayments of the loan itself.
What should you consider?
How much you will be paying in monthly interest payments all depends on various factors, such as the size of your initial loan, the rental value of the property and your personal financial state. A big factor will be what type of loan you took out, either fixed-rate or variable.
Fixed-rate
A fixed-rate mortgage has typically a time span of anywhere between 2 – 5 years, if you decide to go with this type of mortgage, your monthly interest payments will stay the same for the entire term. For some individuals, this can be highly beneficial as it gives them a sense of security in knowing what they will be paying out each month and you can pass this information on to your tenants for their own benefit. The only downside to taking out a fixed-rate buy to let mortgage is that they will normally be more expensive than variable rates.
Variable-rate
This mortgage method is normally listed as your ‘’lender’s default plan’’, they are what most people will get to move on to once your current mortgage deal expires. They tend to have the highest interest rates out of most mortgages, the rate can also change at any time depending on situations that can occur. An advantage is that you can try and look for a better deal with NO exit fees.
Discounted variable
This style of mortgage is at a fixed rate that is normally lower than the lender’s standard variable rate. However, because you are using a form of SVR, there are still risks that prices could rise. A discounted variable mortgage normally lasts for 2 years and after that, you will be placed back onto an SVR.
Letting Agent Fees
There are a lot of added on features that you normally must have in order to have a successful tenure of renting. One to consider is, that if you use an estate agent to manage the property then you will normally have a costly fee that goes with this. Estate agents carry out many services such as credit checks, writing out contracts and chasing any rent that you as a landlord is owed. They can be extremely beneficial, however, just remember to factor in their costs.
Landlord Insurance
This is commonly known as buy to let insurance, it provides insurance cover for the property, the contents in it and any landlord liability. Buildings insurance is something that is required for most landlords and you can be condemned for not having this in place, especially when large fire hazards are seen to be an issue in recent years. Contents insurance will cover existing furniture that is on the property, whilst landlord liability will cover you if a tenant passes away or is injured on your property.
Income Tax
When you are receiving rent from your tenants, this classes as income. Therefore, you must pay income tax. The amount of tax you pay is determined by your tax band; This ranges anywhere from 20% – 45%.
Who can purchase buy to let mortgages?
Trying to purchase a buy to let mortgage isn’t as easy as being accepted for a residential mortgage. You must meet a certain criterion: Firstly, you must already own the home, either outright or with an existing mortgage. You must be in a good financial state, if your credit rating isn’t good then you may as well not go through the hassle of applying for such a mortgage. Furthermore, it is beneficial if you are earning a good salary prior to applying for this mortgage as it shows a stable outcome.
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