Buy to Let Mortgage

A buy to let mortgage is, quite simply, a special form of commercial mortgage loan that is secured against a residential property, which – rather than being inhabited by the landlord, himself, or herself – is let out to tenants.

One of the main advantages of a buy to let mortgage is that you can offset the interest on the loan against your rental income and hence reduce your overall tax bill. Typical buy to let mortgage products do differ from standard residential mortgages in several important ways. The initial decision to offer a landlord a mortgage takes into account the potential rental income from a property as well as – or sometimes, instead of – his, or her, monthly income.

The percentage of the property purchase price that a landlord is permitted to borrow – known as LTV, or “Loan To Value” – is typically restricted to 80%, or 75%, meaning that he, or she, requires a deposit of 20%, or 25%. The interest rates charged for buy to let mortgages are also typically slightly higher than those for standard mortgages. A number of fixed rate, discounted and tracker buy to let mortgages, with flexible features are available.

Buy to Let Mortgage Features & Benefits

Buying a property with a buy to let mortgage loan can provide a private landlord with a steady stream of rental income, plus the potential for capital growth in the value of the property, itself. Over the last 10 years, or so, property investment has been seen as a stable investment – more stable than the stock market, for example – and even in difficult times, when the housing market is in decline, as long as rental income can be guaranteed, the buy to let landlord is unlikely to experience any real difficulties.

Indeed, despite the global “credit crunch”, which has adversely affected consumers and lenders since the summer of 2007, the demand for rental property remains high. Many potential homeowners – even those with a perfectly good credit history – are finding that they are unable to obtain a mortgage loan that is within their means, and so are opting to rent instead. Thus, by concentrating on rental income, rather than capital growth, a landlord can still achieve worthwhile returns on his, or her, buy to let investment.

Generally speaking, to be a good long-term investment, a buy to let property should represent, at least, 75% LTV, and be capable of returning 125% of mortgage repayments, monthly. Rental income is obviously dependent on the property being occupied by tenants at all times, but, even in the most desirable areas, it is possible for properties to lie empty for a month, or two, between tenants. It is advisable, therefore, to take all possible steps to avoid such “void” periods in the first place, and to have contingency plans in place if they do occur.

When selecting a potential buy to let property, try to put yourself in the place of the type of tenant you are trying to attract, rather than relying on your own likes and dislikes. A letting agent may be helpful, as he, or she, will have an in-depth knowledge of the local property market, and be able to advise you on the type of tenant that any property is like to attract.

Even if you find what you consider to be the “perfect” property, it is worth factoring a void period of 2 months in every 12 months into your budget; insurance products that provide cover specifically for this eventuality are also available. Bear in mind, too, that – depending on the age and condition of your chosen property – repairs, maintenance and redecorating may be necessary from time to time, for which you, as landlord, must foot the bill. Additional costs may also include stamp duty, solicitors’ fees, landlord insurance, ground rent (if the property is leasehold) and furniture and fittings (if the property is to be let furnished).

Your level of involvement with a buy to let property, once it is actually in your possession, really depends on you, and the amount of time that you want to invest. You can, for example, advertise for, and vet, tenants yourself, draw up your own tenant agreement – within bounds of the law, of course – and perform your own repairs, if you so wish. Many buy to let landlords, however, turn the day-to-day management of a property over to a letting agent, or company. The agent, for a fee, performs all the actions necessary to find suitable tenants, and usually has an established network of plumbers, electricians, etc. if any remedial work is necessary.