Real Estate

What is a buy to let mortgage?

A buy to let mortgage is a mortgage on a property which is to be let out or rented, rather than occupied by the owner. A buy to let mortgage is exactly as it sounds – a mortgage that allows you to buy a property in order to let if out to a tenant.

This type of mortgage is similar to most others however the buy to let mortgage is designed for people who buy a property with the intention of letting it out.

Buy to let is purchasing a property, letting it to tenants and using the income from their rent to pay your mortgage. Essentially you have someone paying your mortgage for you, but the huge positive aspect is that at the end of the mortgage you have a valuable property and you have had someone buying the property for you with their rent. In summary a buy to let mortgage is simply a mortgage that allows you to purchase a property that you intend to let out.

A buy to let property can therefore been seen by many as an investment. The principle is simple: buy a property, let it to a tenant, and this money should pay the mortgage, perhaps with a little left over each month.

Buy to let mortgages are becoming increasingly more popular as in recent years the property market has proven to be a good investment. However, a buy to let mortgage is not so simple. First, you must be able to raise a significant deposit. Second, the rates on the buy to let mortgage may not be the most attractive on the market, although the market is competitive and there are many decent options available.

Normally people looking for a buy to let mortgage are looking to use their existing property to secure a mortgage on a second property.

A buy to let mortgage is a way to enable you to invest in property. The criteria for lending is worked out differently to a standard mortgage, however there is no limit on the number of properties you may buy to let.

The difference is that the maximum loan-to-value (LTV) is usually lower, meaning that a larger deposit is required. Other restrictions may also apply, such as minimum letting terms and rental income.

Lenders will normally incorporate a proportion of the rental income when calculating how much money they are willing to lend you. With a residential mortgage, the total mortgage repayments are based on the applicant’s salary. However, since a buy to let mortgage is used to finance the buying of a property for rental purposes, the borrower must prove that the rental income will cover the buy to let mortgage.

The big difference compared to a standard home loan is that most lenders won’t just take your salary into account when assessing eligibility. Potential rental income from the property is normally the most important factor in assessing affordability. Another important difference is that a minimum deposit of 15% is required.

Buy to let investors should also consider the downsides. Will you be able to let the property? Will you be able to let the property all year round? Prudence dictates that in calculating whether you are able to afford a buy to let mortgage, you should see whether you would have enough income to support the second mortgage payments when you are unable to secure a tenant.

About the author
John Mussi is the founder of Direct Online Loans who help UK homeowners find the best available loans via the website.