What Is A Buy To Let Mortgage?
There are lots of different types of mortgage product on the market, and building up an understanding of the various types and which is right for you can be daunting: one reason why people get confused or simply turn to someone like an IFA (Independent Financial Adviser) to help them through the process.
So, what is a buy-to-let mortgage?
Well, consider those people who buy a property as an investment, rather than as a home. This means that they are not going to live there, but are going to let it out. The reason to do this is to make money: in the form of rent, so the buy-to-let property is simply a form of investment, and a potentially quite attractive one too.
Depending on the property you own, where it is and the rent you are able to charge, you can get a very attractive yield by doing this (the percentage of the value of the home paid off each year in rent).
Many people like the idea of buy-to-let as an investment because they calculate that by renting a place out for, say, 20 years, then they basically get a house for free: because the cost they paid for the property is covered by the rent paid by people living there for that period of time, after which you have a house for free, that you can then ultimately live in or sell, or continue to rent. All assuming that you can rent it out for the majority of the time, of course, and no major issues come up like incredibly expensive repairs.
People who buy-to-let are those, surprise surprise, for whom a buy-to-let mortgage is relevant, as it is a specific product for people who do just this: buy a home not with the intention of living there themselves, but rather letting it out.
The way that this product works is very similar to a standard mortgage, although lenders do perceive they have a bit more risk, because to pay back the mortgage the landlord (the owner of the property who has bought it to let) may broadly be dependent on renting out the property and then collecting that rent to cover the mortgage.
Wherever there is perceived higher risk, there is higher cost, and thus the interest rate on a buy-to-let mortgage is often higher than a standard mortgage. And also to mitigate risk, there will usually be a higher deposit: you might be looking at around 25% compared to the 10% or so that people often put down on standard mortgages.
The obvious question from the above might be why do people get a buy to let mortgage, if it is cheaper to get a standard one and then let it out? And the answer is simple: mortgage fraud! And if a lender finds out that you have taken out a mortgage on the basis that you are the occupant of the house when infact you moved elsewhere and are letting it out, the consequences could be severe.
Typically to be eligible for a buy-to-let mortgage, a potential applicant will need to have a property already and possibly there could be an income threshold too, so those earning below that threshold could find it difficult to get a buy-to-let mortgage product.
We hope you found this a useful introduction to what a buy-to-let mortgage is, what the product is and how it functions. Remember we have guides to lots of different types of mortgages here at My First Property so do feel free to browser the mortgage and other sections of this site.Last update: 03 Jun 2015
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- Living in Central London Pros and Cons
- Key Questions to ask at a property viewing
- Will House Prices Rise in 2019?