Investing in property is widely regarded as safe investment that can offer lucrative returns. With house price inflation exceeding standard inflation, you will normally benefit from capital appreciation as well as earning a supplementary income through rent each month.
Mortgages on properties to rent are called buy-to-let (BTL) mortgage and hence brokers will often refer to rental properties as BTL properties. BTL mortgages are underwritten in a different way to residential mortgages. The lender is not typically assessing your ability to afford the mortgage based on your income, they’re assessing your ability to afford the mortgage based on the what the property will rent out for. This fundamental difference means even if you don’t have a substantial income, if you have enough for the deposit, a BTL property could be a good investment and income generator for you to consider.
As a first-time landlord looking you to acquire your first buy-to-let property, there are some important things to know…
BTL mortgages can be secured with as little as a 15% deposit. There are a handful of mortgage lenders available with a 20% deposit and nearly the whole market become available if you have a 25% deposit. As with residential mortgages, the greater the deposit and the lower the loan-to-value (LTV), the better the interest rate you have access to. This implies until you have a 40% deposit after which point the interest rates do not improve.
If you don’t already own your own home, you can still get on the property ladder by purchasing a BTL and renting it out. This is a common choice for people who can’t afford to buy in the area they live in but can afford property in other, cheaper areas. As a first time buyer, some lenders would assess your affordability on a residential basis as well as a BTL basis, just as a precautionary measure!
Although the BTL mortgage affordability calculations don’t consider your personal income, there are a handful of lenders who impose minimum income restrictions. Typically, this is at the £25,000 mark. If you earn more than this you will have access to nearly all BTL mortgage lenders whereas if you earn below this amount, there’s a small selection of banks who won’t be available.
Finally, unlike residential mortgages, BTL mortgages are commonly available on interest-only with this being the repayment method of choice for most landlords. If you’re looking at your property as income generator, interest-only makes sense. While you’re not reducing the mortgage balance, the property should be increasing in value. Alternatively, if you’re looking at your property as a retirement fund and aren’t concerned about maximising the rental profit, capital repayment will be more appropriate.
Securing the right property in the right area is crucial when it comes to purchasing buy-to-let properties and maximising yield. Yield is calculated by dividing annual rent by property value and is normally expressed as a percentage. From a number’s perspective, the higher the yield, the better the investment. If you’re unsure of where to invest in your local area, it’s worth speaking to a trusted estate agent or finding someone you know who can help!