How Do Buy-to-let Mortgages Work?

Buy-to-let properties are one of the most popular investment vehicles that provide a steady income over time. But, as the name suggests, they are properties purchased to be rented out to tenants.

 A buyer does not own a buy-to-let property for their use and earns a rental income out of the same. 

If you are planning on getting yourself a buy-to-let property on a mortgage, here is a quick buy-to-let mortgage guide that will help you understand the investment vehicle better. 

What is a buy-to-let mortgage?

A buy-to-let mortgage is a mortgage taken specifically to purchase a property to be let out on rent. These properties are not purchased by their owners for personal use but only to earn a rental income. 

Buy-to-let properties are important investment vehicles as they help you earn rental income over time as the value of the property increases as well. 

How do buy-to-let mortgages work?

The workings of buy-to-let mortgages are the same as conventional mortgages. You would be required to look for an ideal buy-to-let property to generate a good rental income. 

You will then need to arrange a suitable mortgage deal for the relevant property. It is always advisable to take the help of buy-to-let mortgage brokers who scan the entire market and provide you with the best mortgage deals based on your circumstances. 

Once you find the right mortgage broker, they will consider factors like LTV (loan-to-value), affordability, income, credit score, and other relevant details before submitting your application to the lender. Once the mortgage is approved, your solicitor can complete the property purchase after all the legal work is done. Then, your buy-to-let is ready to rent out to suitable tenants.

However, the job is not done once you have found the tenants and put your buy-to-let property on rent. You will need to play the role of a landlord and look after the property. In most cases, landlords are responsible for ensuring that their property is safe, sound, and well-maintained. Some people use an estate agent to look after all their buy-to-let properties. 

Who can get a buy-to-let mortgage?

You can get a buy-to-let mortgage:

• If you are considering investing in a property to let as your own residential,

• If you understand the risks involved in investing in a buy-to-let property,

• If you already have a residential property of your own, purchased either outright or with a mortgage

• If you have maintained a good credit record by paying off all your dues on time.

• If you earn a steady income that would help you in making mortgage payments (apart from the rental income you would earn)

How are buy-to-let mortgages different from residential mortgages?

Although the procedure and working of a buy-to-let mortgage are similar to other conventional mortgages, there are some specific ways in which a buy-to-let mortgage is different. 

The major difference between a buy-to-let and a residential mortgage is that the fees and interest rates are higher than other mortgages. Moreover, borrowers must pay a higher deposit for a buy-to-let mortgage than other mortgages. The deposit for getting such a mortgage can range from 20% to 40%. 

Also, most buy-to-let mortgages are kept interest-only to have more cash flow. This means the borrower must only pay the monthly interest, not the capital amount. Finally, the original amount must be paid to the lender at the end of the term. 

It is also important to note that most buy-to-let mortgages are not regulated by the Financial Conduct Authority (FCA) unless you let the property to a close family member. These mortgages are called consumer buy-to-let mortgages and are governed under the same rules as any conventional mortgage.

The need for financial planning

Getting a buy-to-let mortgage calls for meticulous financial planning. Unlike other investments, borrowers in buy-to-let properties often depend on rental income for mortgage repayments.

 It is, therefore, advisable to have some financial cushioning and reserve for the times you do not get your rental income on time. Ideally, at all times, it is important to have enough funds to cover your mortgage repayments for the next 4-6 months without the need for rental income. 

While purchasing a buy-to-let property can be a good investment, it comes with a lot of responsibility. So, before you choose to get a buy-to-let mortgage, ensure you are prepared for the responsibilities and risks that follow the investment. Also, it is always better to take help from experts mortgage brokers and mortgage advisors in your town to make the right decisions at every stage.

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Created on Jun 24th 2022 00:20. Viewed 236 times.

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