While you would be easily forgiven for thinking that home mortgages are one and the same, buy to let mortgages actually fall into a very different category.
When you purchase a buy to let, it is considered a business transaction which means that rates are often higher than those you will have seen on regular mortgages. The good news is that the mortgage market for both buy-to-let and standard residential investors is the most competitive it has been in years.
Great Mortgage Deals
Brokers are in a fierce battle to win business which means there are some great offers to be had including interest-only, fixed term, variable and capped interest rate solutions.
The vast majority of buy to let mortgages fall into the interest-only category where you will be required to pay off the balance in full at the end of the mortgage term.
Another key difference lies with the eligibility assessment. Residential mortgages place more emphasis on your current income during the evaluation which is why it can potentially be far easier to secure a buy to let deal. With buy to let, the mortgage lender applies a rent to interest cover calculation to work out the ratio of the property’s market rental value against your monthly repayments.
It is your duty as the borrower to prove you can obtain enough rental income to cover the interest costs. In most cases, the rental income has to be between 125% and 130% of the monthly mortgage repayment.
FCA Regulations
We always advise our clients to be aware of the possibility of higher fees in comparison to a standard mortgage. This includes the mortgage “set-up” fees themselves as well as a higher deposit (usually a minimum of 25%) of the property’s value and potentially higher interest rates.
BTL mortgage lending is generally not regulated by the Financial Conduct Authority (FCA) either, although there are some exceptions such as letting the property to close family.
Since 21 March 2016, any transaction classed as Consumer Buy to Let has been regulated by the FCA. This classification marks the distinction between professional landlords with a property portfolio and “accidental” landlords.
Are you an Accidental Landlord?
Those who fall into the latter category might include landlords who have inherited a property that they have chosen to let out or those for whom circumstances meant they needed to move into a second home (perhaps due to relocation) and turned their original property into buy to let.
Buy to let properties over a certain value are also subject to stamp duty as part of a tiered system with the amount due higher for buy to let than residential properties.
Maintaining High Standards
While you would keep the home that you live in up to a certain standard, it’s also important to be aware that you will be responsible for any ongoing maintenance, renovations and improvements on the property in a timely manner, in order to fulfil your duties as landlord.
You can offset the cost of certain expenses against your tax bill including essential repairs and insurance but changing regulations mean that landlords will no longer be able to offset their mortgage interest against their tax bill. This ability to deduct mortgage interest is currently being phased out until it takes full effect in 2020.
Overall, buy to let property represents a valuable long-term investment and growth strategy whereby the impact of any fees, maintenance or tenant management is ruled out by the fact that property remains a wholly reliable and consistent investment choice.
Buy to let represents a tangible asset with two solid income streams through both rental income and capital growth. It is essential to choose a property in a desirable area in order to position yourself for the best return on investment and a steady stream of income to support your investment goals. This is also the perfect time to take advantage of the competitive mortgage market and secure yourself a great deal to support your investment portfolio.
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Our team of professional property investors offer advice on all aspects of property investment and buy to let property. We provide access to market-leading products with the aim to minimise risk and maximise returns. We also offer comprehensive advice and guidance on the fine print of buy to let mortgages. For further advice and support, please contact us directly on 0203 281 7433 or drop an email to info@alescoproperty.com
