A Buy-to-Let mortgage is what you will need if you are planning on renting out the property that you are buying. Or perhaps you already own a property and you now want to rent it out whilst you live somewhere else. There is a lot of information that you will need to get your head around because buy-to-let mortgages do differ a fair bit from your usual run-of-the-mill residential mortgages.
Now there is an awful lot we could talk about in relation to buy-to-let mortgages. Hopefully you already have a cup of tea in hand, but we’d be here all day if we tried to cover everything. So for now, I want to talk about the two main areas that make buy-to-let mortgages different from residential mortgages. These are Affordability and Deposits.
Let’s start with affordability
When we talk about ‘affordability’ what we mean is the calculation that the lender will do to look at how much income you have versus how much you spend each month on mortgages, council tax, groceries etc. It might be worth grabbing the back of an envelope and working out a quick monthly budget to really get to grips with how much you are earning and how much you are spending each month. You might even surprise yourself! I’ve made a quick video, with some tips on how to make a budget planner, so click here to check it out.
Right. Back to affordability. The difference with buy-to-let mortgages is that when the lender is calculating the affordability they are going to look at the rental income that the property is expected to bring in. This will typically be the gross income, so if you are planning on letting it through an agent (who will be taking a percentage) don’t worry, their costs won’t affect the lenders calculations. Once they have the rental income figure, the lender is then going to look at whether that income will be enough to cover the mortgage interest. They will run this calculation using a scale of interest rates so that they know that if rates increase you will still be able to afford the monthly payments. As is always the case, each lender is different so they will all do this calculation slightly differently and give different weightings to different factors. You will need to run your figures past a range of lenders to find the best fit for you (or, of course, you can let us do that for you 😊)
So that’s affordability. Now let’s look at deposits because, again, it’s a bit different with buy-to-let mortgages than it is with residential mortgages.
With a regular residential mortgage, there are some 95% mortgages available. This means that you would need a minimum deposit of 5% of the value of the property. However, for Buy-to-let mortgages, you will need a higher deposit. Currently that is around 25%. So if the property you are buying is worth £100k you will need a deposit of at least £25k. There are some lenders who may allow a lower deposit, say 20%, but, of course, their rates will be higher.
All in all, it’s the same old story, sourcing the right buy-to-let mortgage for you is a tricky business. It is riddled with complexities and hence why we would always recommend that you enlist the services of a mortgage advisor who knows all the lenders well and understands best which one will be a good fit for your circumstances.
Where to begin
Hudson Rose is not your typical financial services outfit. We’re just not really into all the grey corporate stuff, we prefer to let our experience and expertise do the talking. We
have offices in Nailsworth and Cirencester but our clients come from all over the UK. We can do appointments over the phone or by video call so if you fancy a quick chat and some advice on your situation, click here to book an appointment with one of our advisors. We look forward to getting to know you!