If you’re thinking of buying a property to rent out but you don’t have enough cash to buy it outright, taking out a buy to let mortgage could be an option. Buy to let mortgages are a relatively common type of mortgage for people who want to invest in property; let’s take a closer look.
What is a buy to let mortgage?
A buy to let mortgage is secured against the investment property (i.e. the property you’re going to rent out) that you’re looking to buy. Even though it’s a residential property, because you won’t be living in it yourself, you can’t use a residential mortgage and there are some key differences between them.
How does it work?
Similar to a residential mortgage, you’ll put down a deposit (for buy to let mortgages, this is usually a minimum of 25% of the purchase price) and the lender will lend you the remainder of the purchase price. The amount you can borrow isn’t calculated based on your income like a residential mortgage; it’s based on the expected rental income from the property. The lender will look to establish that the rental income you’ll receive from the property will more than cover the cost of the mortgage – usually the lender will look for the rental income to be around 140% of the mortgage payment.
Am I eligible?
Eligibility criteria will vary between lenders, but there are some general criteria that are mostly consistent:
- Even though the borrowing amount isn’t linked to your income, you’ll usually still need to evidence that you have an annual income above £25,000.
- The mortgage you’re taking out will need to finish by the lender’s upper age limit, which for most lenders is when you’re 70 to 75 years old.
- You’re an existing home owner; this doesn’t mean you need to own your home outright, you can have a residential mortgage in place.
How much will it cost?
In addition to your deposit, you’ll need to set aside enough money to cover other costs and fees associated with the purchase. Here are some of the most common types of costs.
- Mortgage product fee (these are generally higher than product fees for residential mortgages)
- Mortgage valuation fee
- Solicitors fees
- Stamp Duty Land Tax
- Landlord’s insurance (you’ll need your landlord’s insurance in place to cover the building at the time you exchange contracts)
If you’re thinking of investing in property through a buy to let mortgage, don’t forget to think about the ongoing costs you’ll have in addition to your mortgage payment, such as your letting agent’s fees, and how you’ll cover costs when the property is unoccupied or between tenants.
A mortgage adviser can help source the right buy to let mortgage to suit your circumstances and will clearly explain everything you need to know about buy to let mortgages.
Find out more about our Mortgage Advice service in Newcastle