Purchasing a property to rent out, or ‘investing in property’ as the modern-day landlord likes to call it, is a great opportunity to increase your monthly income as well as acquiring assets likely to increase in value themselves.
Whether you’re in your 20’s, your 50’s or even older, if you have a lump sum of surplus cash that you do not require or you have a significant amount of equity in your home, this may be something worth considering. Cash just sitting in the bank is becoming less and less valuable everyday as the rate of inflation will exceed the interest rate on your savings and therefore the ‘purchasing power’ of your surplus cash is falling.
There are various investment opportunities but the business of renting out property is generally considered one of the safest and most reliable and it can provide a very lucrative yield. For the ease of understanding in this blog, we will refer to rental properties as buy-to-lets (BTL). As with purchasing somewhere for you to live in, BTL properties can be acquired through a mortgage – BTL mortgages.
So, onto some specifics of BTL mortgages…
BTL mortgages work differently to residential mortgages and the criteria and affordability around them is different also. The fundamental difference is it is not your income which is used to determine whether you can afford the mortgage. A BTL mortgage is given based on the anticipated rental income for the property as this is what concerns the lender in relation to how the mortgage payments will be made.
Typically for a BTL mortgage you will need a 25% deposit although some products are currently available with just a 20% or 15% deposit. However, bear in mind if you’re looking to build a BTL portfolio, most lenders will require the portfolio coverage to be 75% LTV or lower.
The remainder of the purchase price forms the BTL mortgage and this can be taken on a capital repayment or interest only basis. Typically, people wanting their BTL properties as an income source will choose an interest only mortgage as this minimises the monthly payment and therefore maximises the profit from the rent charged. Interest only paying means the debt isn’t repaid however mortgage lenders are more comfortable with this on a BTL compared to as residential as a BTL can be sold at the end of the term and you’ll still have somewhere to live.
Owning BTL properties is like running your own little (or not so little) business. The houses you own are assets which can be leveraged, through BTL mortgages, to increase your profit. You can own the properties in your own name, or you can set up a limited company to purchase the properties. This can provide tax advantages and is potentially a more efficient way to do it depending on your circumstances. Limited company BTL mortgages are charged at a higher interest rate so this is something most appropriate for people looking to build a portfolio rather than owning one or two BTL properties.
Whether you’re a first-time buyer, first-time landlord, looking for an HMO property, holiday let, standard single-let or buying through a limited company, there are BTL mortgage products available for you. As with residential mortgages, each lender has their own affordability calculations and criteria with niches to make them attractive to certain borrowers. If you’ve got any questions around BTL property and BTL mortgages, we’re here to help as always with free, professional advice.