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Complete Guide to Mortgages |
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Buy to Let Mortgages
Property investment
has become increasingly popular with many people deciding
it is a good way to gain security in the future. Buying a
property and renting it out privately is against the rules
of most conventional mortgages so if you want to do this,
you need a buy-to-let (BTL) mortgage.
Although a specialist product, BTL mortgages have become
more readily available from many of the mainstream lenders
as well as the specialist ones over the last few years.
And the range of products is wide with fixed, discounted,
flexible, variable, tracker and self-certification loans
all on offer.
Lending
criteria:
Buy-to-let mortgages are structured in
the same way as residential mortgages: you pay a deposit
and choose the type of rate you want to pay. The
difference is that most lenders will calculate how much
they are going to lend you based on the property's
achievable rent rather than on your income (although some
do still look at your income).
The achievable rent needs to be between 100% and 150% of
the mortgage repayments so if your BTL monthly repayment
was £1000, the lender would expect you to be able to let
the property for £1000 to £1500 a month. This will be
judged by an independent source and is to make sure you
can cover all the other running costs such as insurance,
maintenance, vacant periods and so on.
Some lenders have different lending criteria such as
lending up to 10 times the annual rental income. A house
generating £800 a month in rent would provide an annual
income of £9600, so the maximum mortgage available would
be £96,000.
Your own income isn't assessed as such, though lenders
will obviously want to know that you have sufficient funds
to meet your other financial commitments. And if you are a
first-time landlord, some lenders may stipulate a minimum
income. For multiple, experienced landlords it will be
enough that you rent out several other properties
providing you do so successfully.
Rates
and costs:
Generally, you can borrow up to a maximum of
75% to 85% of the purchase price. Deposits are higher for
BTL loans because lenders need to be convinced that you're
committed to the extra financial responsibility. And the
investment is a significant one as you will need a large
deposit plus the funds to cover the mortgage payments when
the property is empty.
Buy-to-let rates aren't generally as competitive as normal
residential mortgages - although they have improved a lot
over the last few years. This type of loan is seen as more
risky because essentially it is your tenants who
will be paying back the loan, not you. The higher rate is
the lender's way of covering itself.
Arrangement fees can be high on a BTL mortgage and there
don't tend to be many fee-free schemes. Redemption charges
are payable during any fixed, discounted or capped rate
period, as with conventional mortgages, but look out for
extended tie-ins.
And when you sell the property, remember that you will
probably be liable for Capital Gains Tax so employ a good
accountant or financial advisor from the start to help you
minimise the effects of this as much as possible.
Suitable
properties:
Providing you can prove an achievable income,
the type of property doesn't really matter in terms of
getting a mortgage. Apart from the usual restrictions such
as no corrugated metal houses, no distinction is made
between old and newer properties.
Restrictions may be imposed if the property needs
extensive repairs or renovation before it can be let out
but this will be decided by the lender's valuation
officer. Generally, there will be a delay on the full loan
being granted until any necessary work is completed. It is
important to take this into account if you're thinking of
buying a property not immediately suitable for renting out
because it may be some time before there are tenants to
meet the mortgage repayments
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