Everything you need to know about BTL Mortgages
Buying a property is one of the most rewarding ways to generate extra income and in times of uncertainty, property will always remain a reliable and a robust investment, especially if there is capital appreciation and the value of the property is set to increase over time.
The UK economy has experiences changes and challenges that have never been seen before in our lifetimes due to the global pandemic, however the UK rental market continues to soar and seems to be showing no signs of slowing down.
This trend has been confirmed by Spare Room who recently advised that despite COVID restrictions, the UK is experiencing a surge in demand for rental properties in almost all regions. Data from February 2021 shows double digit increases in demand, compared to the same period in 2020, in dozens of UK towns and cities. The notable exception is London, where demand is down by up to 43%.
Despite a global pandemic and multiple lockdowns, renters are still moving – and all key towns and cities in the country (bar London) are seeing increased demand. Ipswich (86%), Warrington (84%) and Northampton (82%) lead the way, showing that it’s not simply a case of renters moving out of London to nearby commuter towns, but a wider demand surge across the country.
This is why UK Buy-To-Let (BTL) or Single Let remains a very profitable property investment strategy that you will come across in the housing market. Despite its ups and downs, it has one of the most stable growth patterns in the investment markets and is always a popular asset for any investment portfolio.
What is Buy-To-Let?
Buy-to-let refers to the purchase of a property with the intention of letting it out to tenants instead of living in it yourself. You can also create extra income if you decide to sell or remortage the property at a later date and the property has gone up in value since when you first purchased it.
A BTL property will often have a BTL mortgage on the property. It is different from owning and living in your own home because this investment cannot be lived in by yourself. If you purchase a BTL, you become a Landlord and with that comes various considerations. You can purchase the property in cash or use a mortgage. You then rent it out and create profit from the monthly cash flow from the rent. It really is as simple as it sounds.
What is Buy-To-Let Mortgage?
If you are unable to buy the invest property outright in cash, you will need to purchase with a BTL mortgage. Instead of your salary which is what lenders consider on a standard residential mortgage for a home you live in, the lender will view the potential rental income of the property as your primary income source. Many lenders will then take your personal income into account as a secondary factor.
A deposit on a buy-to-let mortgage also tends to be bigger than the one required for a standard loan. Most buy-to-let lenders expect a down-payment of at least 25% and the very cheapest deals usually require 40% or more.
Although they often come with low interest rates, there will often be bigger fees upfront. This makes it important to weigh up the interest rate against any fees when taking a buy-to-let mortgage as, in some cases, a higher interest rate might actually work out cheaper.
Here are some things to consider when thinking about getting a BTL Mortgage and reviewing the differences to a standard residential mortgage :
· Fees and interest rates tend to be higher
· Minimum deposit is larger as it is viewed as riskier for lenders
· They’re usually interest-only mortgages
· The amount you can borrow depends on the how much rent the property can generate, rather than how much you earn.
· Lenders may require you to have a minimum salary.
· Most lenders will expect you to own your own home before taking out a BTL mortgage.
Criteria for BTL Mortgages
These are a few things you should consider that the lender will also be reviewing in order to accertain your affordability and criteria:
· Income/Affordability – Often a minimum income of £20,000 - £25,000 is required by the lenders. They will also assess your financial situation. Individuals with larger BTL portfolio - who are considered as Portfolio landlords - may be assessed differently.
· Rental Income - the potential rental earnings that are generated should be at least 125% to cover the monthly mortgage payments.
· Deposit - minimum deposit starts at least 25% of the property’s value but it can vary between 20-40%. The more deposit you can pay, means smaller monthly payments.
· Credit History – the lender will often also review the applicant’s credit rating and review the results; you will usually be asked to provide a personal credit report. You can use tools such as Experian and Equifax to do this.
· Age – the minimum age of applicants is generally 21 and will only lend up to age 75-85 years
All of these bullet points are not set in stone and it is important to note that each application varies depending on your circumstances and the lender.
Types of BTL Mortgage
There are typically two types of BTL mortgage rates available to property investors:
· Fixed - rate – repayments will stay the same; if the interest rate rises, it won’t affect your repayments until the end of the term.
· Variable - rate – the interest rate could go up or down; if the interest rate rise, so will the repayments.
These are reflected in the below two mortgage options:
· Interest-only Mortgage – repayments only cover the cost of the interest; in the end of the mortgage term, the original amount borrowed will be paid back in full.
· Repayment Mortgage – a proportion of the amount borrowed combined with a proportion of the interest will be paid monthly; monthly payments are higher than with an interest only mortgage.
Pros and Cons of BTL mortgages
· Generates income
· Rates for buy-to-let are increasingly competitive
· In high demand as the rental market is currently very strong
· Long-term investment
· Open to older and retired borrowers
· Non-occupancy/no tenants – you still must cover the monthly repayments
· Unexpected repairs and maintenance can be very expensive
· Value of any property can also depreciate
Whether you are starting or expanding your property portfolio, a lot of factors must always be considered in order to help you decide which type of BTL mortgage to grab based on your financial capability to make repayments.
BTLs are a fantastic long-term property investment and when viewed as a long-term investment rather than a quick fix, they can be extremely lucrative when built up over time.
NB We are not financial advisors, mortgage brokers or accountants and you should discuss any queries regarding mortgages with the relevant professional who is fully compliant and qualified to advise you on such matters.