Townhouses with "To Let" sign in the Kensington area

Buy-to-let Mortgage Advice: A Complete Guide

Buy-to-let mortgage types are varied and can have different rules than a standard mortgage.

Buy-to-let mortgage types are varied and can have different rules than a standard mortgage.

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Buy-to-let Mortgage Advice

A Buy-to-Let Mortgage is typically anyone looking into buying a property with the intention to then rent it out. In doing so, you are taking on a mortgage with rules that differ from a standard residential mortgage — for example, some lenders may stipulate that you must already own your own home before approving a buy-to-let mortgage.

However, there is a bit more nuance to this.   

Exploring Different Types of Buy-to-Let Mortgages:

Buy-to-let mortgage types are varied and can have different rules than a standard mortgage. The best one for you is one that fits your long-term financial goals. If you are new to property investment, then The Openwork Partnership has expert advisers up and down the country ready to provide you with financial advice and help you decide which mortgage is best for you.

Interest-only vs Repayment Mortgages:

Most Buy-to-Let Mortgages are Interest-only. This means that each month you pay the interest on your loan, but not the capital amount. Once the mortgage term has ended, you then pay the original loan in full.

A Repayment Mortgage reduces the capital you owe over time and the total interest you’ll pay. Paying off the loan with each monthly payment, by the end of the mortgage term you would own your property outright. 

Interest-only mortgages are often cheaper. Once the term is over, the property is sold to pay off the original loan. Repayment Mortgages, on the other hand, are more expensive. But, at the end of the term you will own the property and all income from the rent beyond this point will set you up well for retirement. 

Fixed-rate vs Variable-rate Mortgages:

A Fixed-rate Mortgage ensures you pay the same rate each month for a set time. The deal usually lasts 2–5 years and, during this time, your interest rate stays the same. Once the term ends, your fixed rate will usually switch over to a Standard Variable Rate (SVR). 

A Variable-rate Mortgage, also known as an SVR, has interest rates that go up or down each month in line with the national interest rates set by the Bank of England. 

With a Fixed-rate Mortgage, you can plan your payments over a set period. However, the fixed interest rate might be higher than the national average, so you might end up paying more than with an SVR. 

A Variable-rate Mortgage offers potentially lower rates if the market is favourable. But, this type of mortgage is best when you already have a financial cushion, as interest rates are unpredictable and can vary. 

Depending on your financial situation, goals, or if you expect a future windfall of cash, the type of mortgage you choose will need to consider everything. Seeking expert advice is the best thing to do. Find out more about how The Openwork Partnership can help you

Assessing Your Buy-to-Let Mortgage Affordability:

When searching for Buy-to-Let Mortgage advice you will often see many different types of Buy-to-Let Mortgage affordability tests. This is because most lenders will want to know if you can afford the monthly mortgage payments. 

The majority of the time you will want to be earning in rent 125–130% of the annual mortgage payments. Thus a mortgage payment of £700 per month should be bringing in £875–£910 per month. You may want to get advice from a mortgage broker as part of your loan application process. 

On top of this, due to the high-risk nature of a Buy-to-Let Mortgage, each lender will have requirements that could affect your eligibility. For example: 

  • Minimum and maximum age requirements. 
  • Credit score requirements – so make sure yours is in the best possible shape. 
  • Income requirements – you will be assessed on your annual salary and the potential rental income. 
  • Deposit requirements – you will need a deposit of around 25%.
  • Stress and affordability requirements – will you be able to withstand significant interest raises etc.? 

It is highly recommended to seek Buy-to-Let Mortgage advice. Find one of The Openwork Partnership advisers near you

Understanding The Financial Implications of Buy-to-let Investments:

Buy-to-let is not a simple case of getting a mortgage and renting out your newly purchased property. There are financial implications that you will need to consider before travelling down the investment property route. 

There are a lot of things that can cause landlords to struggle financially. For example, not finding a tenant quickly, or having a tenant move out. Alternatively, you might be left in a situation where you need to pay for expensive repairs and even pay rehousing costs if your property is no longer liveable. To mitigate such disasters, you will need to insure your property with the relevant landlord’s insurances which will add to your monthly outgoings. 

In general, you must pay income tax on any profit you receive from any rental properties you own. However, rules for tax on Buy-to-Let Mortgages often change. Currently, the buy-to-let tax policy allows you to receive 20% of your mortgage interest payments as tax credits. It is worth noting that you can expense business costs and deduct that from your profit to reduce the amount of tax you will pay. 

Working through all of this with a financial adviser is the best thing you can do. They will give you insight into what you can afford, how to work around the tax on Buy-to-Let Mortgages and give good advice, such as setting up a regular maintenance schedule for your property. 

Conclusion:

Buy-to-let mortgages are fickle and complex. They can be a fantastic asset to your investment portfolio and provide you with a somewhat regular income for years to come or an influx of cash when you retire. 

However, owning a rental property has its financial implications too. Depending on where you rent, the market, or your financial buffer, you might find yourself subject to financial stress when interest rates rise, or you are without a tenant for an unknown length of time. 

In addition, the profit that you make on renting is subject to income tax. 

Buy-to-let properties and mortgages are highly rewarding long-term ventures, but the ins and outs of owning property and managing your second mortgage can be difficult. Most second property owners use a financial advisor to assist with these complexities. Reach out to The Openwork Partnership today and chat with one of our expert advisers

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

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