A Guide to Buy-to-Let Mortgages: Why you need to tread carefully
Buy-to-let is a subject that has certainly been making headlines lately, and opinions are currently divided. Given the comments that have recently emerged from the Bank of England, who have voiced fears that the buy-to-let market could be doing more harm than good, we bring you a quick guide to buy-to-let mortgages, how they work and how to tell if they are right for you.
What is buy-to-let?
A buy-to-let mortgage is designed for landlords who purchase a property as an investment in order to rent it out. Because this type of mortgage has been specifically designed for those who are investing in property, different rules apply when it comes to securing one, and they are not suited for everyone.
The rules of a buy-to-let mortgage can vary much more between lenders compared to a standard mortgage. Some lenders will require a higher deposit, such as 25% or even 40%, whilst others may apply higher fees or additional rates.
How do buy-to-let mortgages work?
In principle, a buy-to-let mortgage functions in exactly the same way as a standard mortgage: a person borrows money from the bank to purchase a house and repays a certain amount every month, with interest. However, there are several key differences.
- Deposit – As mentioned above, the minimum deposit required to secure a buy-to-let mortgage will usually be higher than that needed for a standard mortgage. According to the Money Advice Service, the standard buy-to-let deposit is usually 25% of the property’s overall value. Some lenders may offer deals that require deposits of 20% but some may ask for as much as 40%.
- Interest rates – The monthly payment of a mortgage is made up of a lump sum that comes off the mortgage itself, and a percentage of interest. As of September 2015, the Bank of England interest rate currently stands at an all-time low of 0.5%, however the rate of interest applied by banks to buy-to-let mortgages will often be significantly higher.
- Fees – Alongside the deposit, surveys conducted on the property and any legal fees, those applying for a mortgage also have to pay certain additional fees, such as for booking and making arrangements with the bank. Those entering the buy-to-let market will find these charges to be a little more expensive than usual.
The future of buy-to-let
Buy-to-let mortgages have come under fire over the past few months, and as a result it appears that a number of changes are going to be introduced that may make the process a little trickier. Some have criticised investing landlords for purchasing houses and then renting them out, when these properties could be bought by first-time buyers or those who are looking to buy-to-live.
During the emergency Budget held on 8th July 2015, the Chancellor of the Exchequer George Osborne announced a new measure of restricting tax relief on buy-to-let mortgages. Under the current rules those who purchase a property and then let it out are able to offset their monthly payments against their working income. However, the rules will be changed to cut the amount of tax relief that landlords are able to claim. The new changes will be introduced in April 2017 and phased in over four years until the tax relief amount claimed is the same as income tax. This measure was introduced to create what the Chancellor called a “level playing field” between buy-to-let landlords and those looking to get on the property ladder.
That being said, buy-to-let mortgages can still be a fantastic investment for those who are looking towards the long term. Although the aim is certainly to get more people on the property ladder in a home of their own, there will always be a demand for rented properties, especially in cities for students and young professionals. The trick is to ensure that this is the right choice for you and your financial situation.
Is buy-to-let right for me?
Buy-to-let mortgages certainly aren’t for everyone, and are only suitable for those who are actively looking to invest in property and can afford to do so, as just like any other investment, property comes with its risks.
Taking out a buy-to-let mortgage certainly isn’t suitable for a first-time buyer, in fact you would probably struggle to get a buy-to-let mortgage if you don’t already own a home, either with an outstanding mortgage or outright. You have to be able to prove to the lender that you are able to afford the mortgage repayments, otherwise they won’t consider your application.
Your credit rating should be strong, you should be able to show that you can handle your finances and have a good income, at least £25,000 a year. If you are stretched too thin or have too many outgoing payments, such as credit cards or your existing mortgage, then you may not be able to prove you can afford the monthly repayments.
As with any long-term investment, whether you are purchasing a property to let out or to live in, it is essential that you take the time to evaluate your individual circumstances to decide whether it is right for you. Do as much research as possible, and seek help from a trusted mortgage adviser in your local area, as they will be able to analyse your finances to see if you are in a position to make an investment. The key is not to rush into any big decisions; this is a pretty big life-altering choice so take the time to ensure it is right for you.