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UK Mortgages Guide
Non Standard Mortgages - Buy To Let
Features Of Buy To Let Mortgages
Up till the end of the nineties, buy to let mortgages offered
rates of interest that were significantly higher than owner-occupier
mortgages, often charging a premium of more than one percent.
Today's mortgage market contains a large number of special
products that are aimed specifically at the buy-to-let market.
These mortgages do not differ vastly from other mortgages
- you can usually find discounted, fixed, capped and base
rate tracker buy-to-let mortgage rates. Although you may
still not get such heavy discounts and introductory offers
as you would with owner-occupier mortgages, but at least
the Standard Variable Rate is usually more or less comparable.
However, there are three key differences in comparison
to standard mortgages:
- The biggest single difference between a buy to let mortgage
and homeowner mortgage is the maximum proportion of the
property value that the lender will advance. Almost without
exception, you will have to pay a larger deposit on a buy
to let property. The minimum deposit is usually 15 percent,
but some of the more competitive deals will only be open
to those with larger deposits, often as large as 25 percent.
Therefore, this type of investment is only viable if you
have the necessary deposit as well as the funds to cover
your mortgage payments during void periods, maintenance
of the property and other miscellaneous costs, realistically
putting it well out of the reach of many people.
- Although the gap has narrowed, buy-to-let mortgage rates
are not normally quite as competitive as homeowner mortgages.
Since you are not paying back the mortgage directly to the
lender and will probably be relying on your tenants to pay
their rent, the lenders see buy-to-let mortgages as more
risky than other types of home loans. This means that you
have to pay a higher rate to compensate them for the higher
level of risk.
- Lenders will normally incorporate a proportion of the
rental income when calculating how much money they are willing
to lend you. Unlike the lending criteria for other mortgages,
where the lender may stick fairly rigidly to the income
multiples that they use, this allows you to purchase property
beyond your normal price range - provided that you can raise
the deposit. You should still be slightly wary of over-stretching
yourself though - remember that you cannot guarantee you
will always have tenants in the property, and if it is vacant,
you will have to foot the mortgage bill on your own.
- A secondary criteria is that most lenders set the amount
by which they expect rental income to exceed your monthly
repayments. This usually ranges from 125 percent to 140
percent and will normally be verified using some form of
independent market valuation or letting appraisal. This
is so to ensure that the rental income covers the mortgage
and all of the other running costs such as agents fees,
insurance, void periods and so on.
Two final points as regards the features of buy to let mortgages:
Watch out for hefty redemption penalties that exist on some
buy to let mortgages - typically six months interest for the
first 3 years.
Remember that when you sell the property, you are normally
going to be liable for Capital Gains Tax at your highest rate
of income tax, so you should arrange for a good accountant
or specialist advisor in making sure you address this, and
all of the other tax issues, as effectively as possible.
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