If you spend your days researching mortgage options, you may have stumbled upon an idea about the buy-to-let one. It represents the type of mortgage you need to get if you’re planning to rent out your home on a long-term basis. While it’s true that it’s quite similar to a standard residential one, there are some significant differences such as price or purpose.
Providers tend to see a non-standard mortgage as a more risky option since: a) most landlords face problems with rent collection, and b) it’s improbable that your property will constantly be occupied. Yet, the truth is there are still pros and cons worth considering, so let’s have a look at the things one should know before opting for a buy-to-let mortgage.
1. Understand who can get it
The first thing you need to be aware of is that applying for this type of mortgage isn’t as simple as applying for a standard residential one. In case you’ve already made up your mind and decided that you want to become a landlord, but you still don’t have enough capital to make this a reality, this option will definitely be a real deal for you. Yet, before you involve yourself in this, you must understand if you meet certain criteria to obtain it.
The main point you need to tick off from the list is owning a home – entirely or with a loan. If you align with this requirement, your lender will evaluate your financial situation, and this process is pretty much the same as for all mortgage applications. You’ll have better chances of getting approval if you have a good credit rating, as well as not having huge levels of debt on your credit card.
Another, very important aspect is your earnings. Most lenders expect potential landlords to have a yearly income that’s at least £25,000. Also, you need to be aware that your age may be an obstacle for lenders to approve your loan, as most providers have set the upper age limit which is usually 70 or 75 years old. This means that, if you’re older than 65, it may be difficult for you to qualify for this type of mortgage.
Why is that so, you may ask? The upper age limit refers to the age you’ll complete your term. Most terms last for about 25 years, which implies that you’d need to be 45 years old or younger in case you want to secure your loan. Yet, the good news is that not all lenders require meeting this requirement, which enables you to get this type of loan no matter how old you are.
2. What’s the amount that you can get?
The amount that you can get from a provider depends on how much you can get for renting your home. You can always count approximately how much rent you can charge for it by researching similar properties in your neighborhood. That amount needs to be verified by the surveyor since that’s one of the lender’s requirements.
You need to know that the majority of lenders require that you receive 125% of your monthly interest payments in rental income, but that amount can sometimes even go up to 145%. Let’s explain this the easy way – if your monthly interest is $600 and your provider wants your rental value to be 125% of your interest payments, then you need to charge your tenants at least $750. The more you can charge in rent, the higher the loan you qualify for is.
A buy-to-let has a loan-to-value (LTV) ratio – if your property value is $200.000 and your loan is $180,000, then your LTV ratio would be 90% and your deposit would be $20,000.
3. What will happen when an interest-only deal ends?
Once such a deal ends, you are still not done with paying off your provider. You’ll be expected to pay off the property value at the time you purchased it. So, how is this solved? Most landlords tackle this by selling their property – it can be a situation in which most people make a profit, but it’s also a risky business.
The problem occurs when you decide to sell your home but learn that the house prices have fallen since you bought the property and that the current price of the house is lower than when you purchased it. In that case, you’ll need to cover this cost with your own money.
4. Learn more about stamp duty
Stamp duty is a type of tax that’s put on any transaction related to the sale of land or property. Be aware, as this fee is bigger than the standard one in case you’re purchasing any buy-to-let property above $40,000. Better get ready to pay an extra 3% on top of the standard fee – and the best way to do it would be to simply add it to the cost of the property you’re planning to buy.
5. Consider buy-to-let mortgages for limited companies
If you want to get this type of mortgage through your limited (LTD) company, you need to ensure that you have professionals by your side.
There are different tricky situations you can get yourself in in case you’re planning to apply through this kind of company – it has become common for such corporations to get declined because of the improper advice they received. Luckily, the internet is full of great tips that depict all factors and criteria involved in obtaining such a loan. For anyone who craves expert buy-to-let advice they can rely on, it’s possible to read more here and get familiar with all the necessary steps that should be followed.
6. Consider investment yield
Finally, you can work out a yield in case you work out the annual rental income, minus any mortgage costs that you have for that year, divided by how much the property value was.
For example, if the value was $150,000 and your annual rental income is $7,500, your yield would be 5%. Locations make a huge difference to this – for example, some surveys have shown that places and cities with high student populations offer the highest possible yields. Take this into consideration and think wisely about every step – that’s the only way you can get the best out of your possibilities!