What is a buy-to-let mortgage?
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A buy-to-let mortgage is a loan you take out to buy a property which you intend to rent to tenants. The mortgage might be a second charge on your own home or, more usually, it is secured against the property to be let.
It is a long-term investment which you hope will generate an income from rents and a capital gain when you sell the property. But there is no guarantee that you’ll make a profit on your investment.
How much can you borrow?
The maximum you can borrow is usually linked to the amount of rental income you might expect to receive. For example, a lender might require the projected rental income to be 30% higher than your mortgage payment. Typically, you’ll need to pay a deposit of around 20% of the value of the property.
What type of mortgage can you have?
You can have either a repayment or an interest-only mortgage.If you choose an interest-only mortgage, you should think about making capital repayments when you can afford to do so to reduce the amount you’ll need to repay at the end of the mortgage term.
You might feel this is unnecessary if you intend to sell the property to repay the mortgage. However, bear in mind that, if house prices fall, you might not be able to sell for as much as you had hoped. And you will have to make up the difference if the property sells for less than what you owe – a risk that increases, the higher the percentage you borrow. If you sell for a profit, you may have to pay capital gains tax.
Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up, eating into – or even wiping out – your income and profit.
The risks of buy-to-let
Tips for buy to let mortgages
