Buy to Let Mortgages

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Buy to Let Mortgages

Buy to let mortgage guide

A buy-to-let mortgage, also known as an investment mortgage, is designed for borrowers who want to buy a property to let out to a third party (e.g. tenants). The amount that the buy to let landlord receives in rent may be over and above the mortgage payments and will help to offset the management and maintenance costs of the property.

Over the past few years, more and more people have taken to investing in buy to let property as a long-term opportunity to make profitable returns, as well as a way of securing finance for their retirement plans.

Within this buy to let mortgage guide, you will find information on:

There are currently plenty of competitive buy to let mortgage deals on the market that are specifically aimed at the buy-to-let sector. These range from special offer buy to let mortgage deals to variable and fixed and rate options.

It is imperative to find the best buy-to-let mortgage rates as this may determine whether you can afford the buy-to-let investment.

UK mortgage lenders will often assess buy-to-let mortgages on the earning potential of the property (i.e. the rental income) rather than affordability. However in more recent times the decision is based on the estimate given by the surveyor as to what the rental might be.

Popularity of Buy to Let Mortgages

The popularity of buy to let mortgages has soared

In 2006, 10% of all mortgages taken out by UK homeowners (a record £17.5 billion) were buy-to-let mortgages - highlighting growing popularity. In fact, over 152,000 buy-to-let mortgages were issued in the just the first six months of 2006.

The main reasons behind the growing popularity of buy-to-let mortgages include:

The attraction of having a property as great long-term investment
Low interest rates - buy to let mortgages offer an attractive alternative investment
High demand for rental accommodation due to a rise in the overall UK population, high divorce rate, and a growing number of higher education students
The offering of competitive, specifically-designed, accessible buy to let mortgages by lenders to make life simple for the landlord.

Frequently Asked Questions

Buying a property to let can benefit the private landlord in two ways. Firstly, it can provide a stream of income. Secondly, many Buy to Let landlords purchase property because of the potential for long-term accumulation of capital growth. This section provides guidance about how to take out a successful buy to let mortgage, the pitfalls that may occur and the knowledge needed to avoid them. Click here for more buy-to-let FAQs.

There are 3 main differences in buy to let mortgages:

Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not ever considered.
Interest Rate - buy to let mortgages have slightly higher interest rates.
Larger Deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit.

Becoming a private landlord should not be seen as an easy way of making easy money. It can be riskier and more complicated. It can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will continue to rise. That said, having a second property to let to tenants could reap considerable financial rewards over time. Click here to find buy to let mortgage deals.

When buying a second property to let you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property as it increases in value over time? The decision may affect the type of property you purchase, and the location.

When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 135% of the rental property's interest only mortgage repayments in order to cover your costs should anything go wrong.

These additional costs include:

Property upkeep - maintenance costs for the property.
Letting agent's fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
Ground rent / service charges - applicable to leasehold properties.
Legal insurance - to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
Insurance - building insurance and contents insurance for the items provided as part of the rental agreement.
Furnishings - the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
Gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
Decorating costs - the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.

When choosing a property to let it is wise to take advice from local letting agents to determine; what type of properties are in need, and in which parts of the town is best or most wanted. They can tell you if there is a University in the town, and if students are looking for somewhere to live. The Association of Residential Letting Agents (ARLA) state that a property needs to be in the right area, close to transport and other facilities, and in good condition.

When choosing a letting agent to act on your behalf it is very sensible to choose one that is a member of the ARLA. The reason being, all members of the ARLA must join in a bonding scheme to protect rent and tenant's deposits. The bond provides total compensation of up to £2 million a year.

There are a number of tax issues that need to be looked at in order to maximise your tax position, such as being able to offset your maintenance costs, letting agent fees etc as well as any interest paid on a buy to let mortgage against your tax.

You can visit the ARLA website at www.arla.co.uk for further information on becoming a private landlord.

Our quick mortgage enquiry form enables you to get a range of advice on buy to let mortgages.

For more information about insurance for students in Buy to Let properties, please visit Endsleigh.

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