What is a buy-to-let mortgage? That’s the first question that needs answering.
Put simply it is a mortgage arrangement whereby an investor borrows money to buy property in the private rented sector in order to let it out to tenants. It is a British arrangement which is relatively new, having been on offer only since the late 1990s.
Interest rates and fees using the buy-to-let system are usually slightly higher than for an owner-occupied mortgage,
It is a type of investment that has become very popular in recent years as house prices have increased and there is the added attraction that tax advantages are available.
With the property market as it currently stands, the Buy To Let sector is the one that continues to boom. Average UK rents have risen considerably since 2006 while capital values in most places have remained static or fallen. The proportion of UK households renting has also increased in the past decade and there is a big demand for rental properties, particularly in the big cities. In one part of London, for example, four out of every 10 homes are privately rented, now owned. It is, therefore, hardly surprising that that this sector is regarded as a sound investment, even in these troubled economic times.
It may no longer be quite the money-maker it once was, but, as an investment for those with sufficient capital to put down a big deposit, it is still an attractive proposition, especially if you compare it to low savings rates and the volatile nature of the stock market.
If you are planning on investing in this way then you should thoroughly research the market so that you are completely satisfied that buy-to-let is the type of investment for you. Once you have decided to go ahead there is something else you need to do before you even contemplate making a purchase – and that is work out the economics. Make a note of the typical cost of houses that you might be interested in and the rent you are likely to be able to charge.
At one time it was common for lenders to look for a deposit of 15%, but the financial crisis has seen many asking for 25% and, in some cases, even more, and for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees. So do your homework. Be absolutely certain that you know exactly how much your mortgage repayments are going to be.
Also make sure that you cover every eventuality. Be aware that there might be rate rises in the future, or that your property might stand empty for a period, so there is no rent coming in. You will always have to remember as well that if you, as landlord, cannot meet the conditions of your mortgage repayments, then the bank will seek to take possession of the property and sell it to gain the loaned money.