What are the main differences between a buy-to-let and homeowner mortgage?
As property investment becomes more popular each year, more people than ever before are exploring their options and looking at how they can become a buy to let landlord.
Who can get a buy to let mortgage?
As with any mortgage, a buy to let product is available to a wide range of people whether you are looking to buy a completed property or a mortgage for an off-plan property.
While this is not an exhaustive list, you can generally get a buy-to-let mortgage if:
You already own a home outright or with a mortgage
You have a good record for repaying loans and debts and have a positive general credit record
Your income is more than £25,000 a year
You can pay off the mortgage before you reach the upper age limit, normally between 70 and 75 years
As with a homeowner mortgage, your buy to let mortgage eligibility will depend on your personal circumstances so make sure to consult with your financial advisor and mortgage broker for information that is accurate to your circumstances.
Typically hold 25% deposit and further funds for stamp duty and associated fees
What is the difference between a buy to let mortgage and a homeowner mortgage?
While both kinds of mortgages are fundamentally similar and versions of the same thing – borrowing money to buy a property – there are several clear differences between the types.
A residential mortgage is only available for a property that you intend to live in yourself as the owner-occupier. This is the “normal” type of regulated mortgage that makes up the vast majority of mortgages in the UK and is based on affordability calculations comparing income to expenditure.
If you are trying to purchase a property to let out to a tenant, you will require a buy to let mortgage instead. Buy to let mortgages will typically utilise the future rent from the property to define the borrowing amount. To minimise any risk, lenders will usually take measures to ensure greater security.
From the point of view of the investor, this can mean that a buy to let mortgage comes with a higher barrier of entry than a residential mortgage – something which should be taken into account and prepared for.
You will have a choice of mortgage types in the same way as if you were getting a homeowner mortgage – either repayment or interest. A repayment mortgage is where you have paid the loan off in full by the end of the term through monthly repayments.
An interest-only mortgage is where you pay only the interest on the loan rather than the loan itself. With buy to let property, you can achieve full interest only borrowing typically up to 75% loan to value. This facility type will see you only service interest only the loan and therefore typically provides lower monthly payments.
This is beneficial for your cash flow model of the investment property. You will not be repaying the principle on this facility type. This means that at the end of the term you will need to pay the loan amount in full. For buy to let landlords, this normally means selling the property and paying it that way. The theory is that the property should have increased in value by then so you will be able to pay the balance of the mortgage and make a healthy profit via capital gains.
What deposit is usually required?
The minimum deposit required to secure a buy to let mortgage is typically 20% of the property’s value, although it can be as high as 40% depending on the lender and the terms on offer. The majority of lenders will offer buy to let facilities however up to 75% of the property’s value and thus require a deposit of 25%
If you are buying a property off-plan you may have to pay this much as part of the staged payments to exchange on contracts in the first place. For this reason, all Alliance Investments properties meet this criteria of the buy to let mortgage qualification process.
For an explanation of why a larger deposit is needed for a buy to let mortgage when compared to a homeowner mortgage, please keep reading.
How much can you usually borrow for a mortgage when investing?
What you can borrow with a buy to let mortgage is dependent largely on the potential rental income of the property itself. This is determined through evaluations of the property and its surroundings, for example the lender will look at other similar properties nearby to determine the likely rent.
Generally, the rental income should be around 25-30% higher than the monthly mortgage repayments in order to satisfy the lender.
You will also need to have a salary of at least £25,000 for most lenders to consider you for a buy to let mortgage. They will want to know that you can cover repayments in the event of a tenancy void or other scenario that results in non-payment of rent.
Overall, a buy to let mortgage is a great option for investing in UK property and is commonly used by investors from around the world. If you want to learn more about the UK property market or get a recommendation for a trusted mortgage broker on one of our properties, get in touch with the team today by clicking here >>
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