If you want to buy a property that you intend to rent out to a tenant, you will need to apply for a buy-to-let mortgage.
It is an unwritten rule, but most creditors deal with buy-to-let mortgages in a different way from home mortgages. They tend to charge 1% – 2% higher interest (by calculation), and the deposit is usually higher. Lenders will also review your application differently and subject it to different lending conditions.
When buying, it is important to inform the lender if you will be moving into the property or whether you will be letting it out. If you are using a broker, they can help you identify the best product for you and help you set off on the journey to becoming a landlord on the right foot.
What are the advantages of a buy-to-let property?
Many people consider property management as a lucrative investment, and they are not wrong. Provided you have all the relevant information and act proactively. Here are some long-term benefits of the buy-to-let business:
- Enjoy steady income from rent proceeds
- Tendency for rents to rise above inflation
- Potential growth value when the property market rises
If the value of your property rises, you stand to gain some profit by selling it. Particularly if you buy in a thriving area. Conversely, if property prices stay the same, your rental income may just be high enough to knock of a significant part of your mortgage and contribute to your property’s equity growth.
While there are no guarantees that the value of property will continue to increase, it is advisable to envisage the likelihood of your property’s value remaining stagnant for years, or even declining if the market performance drops.
How to obtain mortgage for a buy-to-let
The typical buy-to-let market is highly competitive. However, lenders will always be cautious to avoid a recurrence of the great financial crises of 2007. While landlords are advised to buy a residential insurance policy, lenders adopt the following criteria:
- Depending on the type of property (and its location), a mortgage deposit of 25% – 40%
- New build homes usually require a 35% deposit because they are believed to be a higher risk
- Many lenders will want to see some evidence that the market rate for the rent proceeds is at 125% of the mortgage payments. See more rules here.
There are many mortgage calculators online to help you figure out how much you should deposit for your mortgage assuming you know the price of the property.
Are you qualified to get a buy-to-let mortgage?
Besides the lending criteria, you will be required by some lenders to meet some personal conditions. Examples include:
- Minimum age of 25 years
- Minimum income earned; £25,000
- A highly satisfactory credit score
And if you are planning to amass a collection of properties in a portfolio, additional qualification will be required.
If earning a rental income is the main objective of the property investment, then it is important to try expanding your yield. You can calculate rental yield by dividing the annual rent to be earned (from the property) by the value of the property, and expressing it as a percentage.