Are Buy-to-Let Mortgages a Good Idea?
A buy-to-let mortgage is a loan designated for buying or refinancing property that is going to be used as a rental property. This type of financing has become popular because certain areas of the country have experienced a significant increase in demand for rental properties. It is designated as a business transaction and the rates and fees may be more than those associated with a standard residential mortgage. Obtaining one of these mortgages could also require providing a significant down payment. They are offered by many different types of lenders. In some situations, these mortgages aren't available on the open market and may require the use of an intermediary like a Commercial Finance Broker (CFB).
What Is A Buy-To-Let Mortgage?
When a person applies to a lender for a buy-to-let mortgage, the potential rental income of the property will be a major determining factor in approval. The salary or wages of a person applying for the loan is not as important as a property’s potential for rental income. Once a buy-to-let mortgage is approved, the owner is then expected to rent the property out to tenants. This is something that can't be done after being approved for a residential mortgage. The approval of this mortgage will also be based on a property's location as well as its condition and more. Certain properties like ones where tenants live above restaurants, offices, shops and more are not considered good candidates for a buy-to-let mortgage. Holiday homes, new buildings are also types of property that are difficult to get financed with a buy-to-let mortgage.
Benefits of a Buy-To-Let Mortgage
There are many benefits to people who choose these mortgage options. The majority of buy-to-let mortgages are interest only and not designed for full repayment. A borrower will only pay the interest on their mortgage loan each month and repay the capital debt when the property is sold. This makes the monthly payment on the mortgage much less than if repaying the entire loan. It's also possible for the buy-to-let mortgage holder to offset a certain amount of interest against their taxes. It also enables a property owner to earn an income in two different ways. They can earn money from tenants who pay rent on the property as well as through capital growth. This could be significant if the property is located in an area with growing property values. Should the value of the property increase over time, the owner can use this as leverage and purchase additional rental properties. Once a property owner has a number of long-term tenants that are reliable, it will provide them with a dependable and predictable source of income.
Qualifications Needed to Apply
One of the considerations for approving a buy-to-let mortgage is how much will be borrowed in relation to the value of the property. This is known as the loan to value ratio (LTV). In many situations, LTV ratios for buy-to-let mortgages are approximately 80 percent. There are lenders who reduce it down to 75 percent. Another consideration is the relationship between the income produced from the rents and the mortgage repayment. This is known as rent to interest (RTI). It is a calculation that shows if a borrower can obtain sufficient rental income from the tenants of a property to pay the interest on the mortgage. Most lenders will want the rental income to be at least 125 percent of the monthly mortgage payment. In some situations, mortgage lenders have wanted it to be as much as 145 percent. It is possible for a lender to use the mortgage applicant's gross income to help determine approval. This often happens if someone is going to be a landlord for the first time. They may also have to meet the standard affordability criteria set by the lender. The length of the mortgage could be as short as five years or as long as 40 years depending on the property and the borrower.
A buy-to-let mortgage is a great way to purchase rental properties. As with all investments, it comes with benefits and risks. It is possible to develop a significant and stable income from rent payments. Wealth can be accumulated if the value of the rental property increases over time. It can also come with risks. There are tenants who are problems and must be dealt with by following the law. If a property owner is unable to meet their mortgage obligations, the lender will want to take possession of the property. It's important for a person considering a buy-to-let mortgage know their goals as well as all the risks and benefits associated with it.