The Property Ombudsman

How do buy to let mortgages work?

Buy to Let Mortgages

With the number of landlords set to rise significantly this year, many are turning to buy to let mortgages in order to fund the growth of their property portfolio.

Recent figures released from the Bank of England has highlighted that the number of mortgage approvals in the UK has reached its highest level for 6 years. Confidence in the housing market is at an all-time high and this, along with the discounted prices and high returns, is contributing to a rise in the number of buy to let investors.

While some investors may choose to make property purchases with cash, some may not always be aware of the benefits of a buy to let mortgage. As lending is on the rise and mortgage rates are at an all time low, it’s vital to know what the various different options are and what can work best for each individual investor.

Residential vs BTL

There are a number of differences between a buy to let mortgage and a standard mortgage and knowing what sets them apart is fundamental. Like with a standard mortgage, a buy to let mortgage offers a loan secured on the value of the property you are either buying or already own, but there are a number of differences to be aware of:

  • Buy to let mortgages can be fixed, tracker or variable-rate as with standard mortgages
  • They are often interest-only, rather than repayment mortgages
  • Buyers usually have to be over 25 years of age to be approved
  • There can be restrictions on the number of buy to let mortgages an investor can have with any one lender
  • Personal income is taken into account during the lending process but investors will mostly be assessed on rental income of the property which they plan to purchase or remortgage
  • A higher deposit will be required than it would be with a standard mortgage, often around a quarter of the property price.
  • Buy to let mortgages are more readily available for people over 60 years old. One lender even offers a 35 year term for buyers up to the age of 70!

Although the initial deposit is higher when lending specifically for buy to let purposes, the decision based on rental income as opposed to personal income is the main benefit to investors – good yields on a property are more likely to be approved by a lender.

If an investor already has a mortgage of their own, or has just recently finished paying one off then, understandably, the thought of paying off another mortgage can be a bit daunting. However it’s important to bear in mind that, unlike a standard mortgage, the rental income from the property covers the mortgage repayments. So, as long as the investor has enough capital for a deposit, then the rental income from the property will then cover the mortgage itself. In addition to the mortgage, rental income will cover maintenance & management costs and also leave a profit. When purchasing wisely, investors should also look for a balance of rental income and capital growth from an investment property.

The Benefits of Leveraging

Many investors choose to maximise returns by purchasing buy to let property using a mortgage – a process known as leveraging or gearing. Often, leveraging can help increase an investors returns. For example:

As it currently stands, property prices are seeing an annual increase of approximately 6%. If this continues, an investor who purchases a buy to let property for £125,000 with cash will see their asset worth an extra £7,500 the following year. 

By purchasing using a mortgage, an investor could take their original £125,000 and use it to buy 5 buy to let properties worth around £100,000, each with a mortgage deposit of £25,000. Not only will they still receive a rental income from each property, but also the return on investment would see five times the capital growth, at 6%, that’s £30,000 per year rather than £7,500 increasing their return on investment by a considerable amount by utilising their mortgages.

How to get the best deal

Due diligence is an important part of investing in buy to let property. Location is a key indicator for an experienced investor and although capital growth is a major advantage, a higher rental yield will equate to a much higher level of income.

As mortgage lenders assess individuals on the rental income of the property, it’s vital to do the research into the best properties and locations specifically for buy to let in order to get a higher chance of approval. Looking at the market in its current form, London does have capital growth potential however yields on average sit at about 3-4%. In the North West, yields average at a much higher 7-8% with some cities ranking as the top buy to let hotspots in the UK. Plus, there is still the added advantage of capital growth.

Many investors, whether they be first timers or experienced ones with multiple properties, will look to get professional financial advice on their buy to let purchases. Each mortgage lender will offer something different depending on the buyer so it’s wise to be aware of all the deals on the market so an informed decision can be made, and the investor can ensure that they’re getting the best possible deal.

If you're looking at a buy to let mortgage, or are considering refinancing to purchase a buy to let, we can recommend mortgage advisors to help you through the process. We work with professionals in the industry who have the knowledge and expertise to source the best deals on the market that suit your individual needs. Speak to our team today on 0800 011 2277 to find out more. 

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