Buy to Let Mortgages, A Beginners Guide

May 16, 2012 by  Filed under: Loans 

Buy to let mortgages rose to popularity through the first decade of the new millennium, with many looking to capitalise on rising house prices and attractive rental yields. The credit crunch in 2008 reversed the trend, resulting in restrictive lending policies greatly reducing the number of successful applications. Fast forward to 2012, rapidly rising rental yields have reignited interest in the sector.

A buy to let mortgage is a loan secured on a property (as with a residential mortgage), however repayments are serviced by the rental income derived from the property rather than from personal income. From a borrower’s perspective, rent received should comfortably meet the monthly mortgage payments or finances could become strained.

Requirements?

In order to be considered for a buy to let loan, you must have a substantial deposit (at least 20%), and have a minimum personal income (varies from lender to lender). In addition, the lender will want to make sure that the rental income is sufficient to meet the monthly mortgage costs, with allowances for periods of absence. A typical rental income requirement would be 125% of the monthly mortgage interest payments at the payment rate. For example, for a mortgage of £120,000 at 5.99% with a 125% income requirement, monthly rent would need to be at least £750. Specific criteria varies. Any negative credit history is likely to impede an application also.

Loan types:

If you are eligible for a buy to let loan, the usual options will be available, fixed, tracker or variable, but rates do differ from residential mortgage rates and you should expect to pay more. In addition, provided that you have a sufficient deposit, the lender may allow you to borrow on an interest only basis.

What are the benefits?

A buy to let property is an investment and the benefits are potentially twofold. Firstly and traditionally, if the price of the property rises, the investor stands to benefit on the eventual sale although costs and charges also need to be taken into account. Secondly, depending on whether interest only or repayment is selected, it is possible to either build up equity in the property (repayment) or derive an income (interest only) provided rent exceeds the income payment. Investors looking for capital growth often opt for a repayment loan whilst those looking to release an income, perhaps for retirement may prefer an interest only loan.

What are the drawbacks?

The most common and perhaps obvious drawback of buy to let is that if the property is unoccupied, the mortgage will have to be paid from personal income. For some investors, this can result in finances being strained. As daytime TV will inform you, location is everything! selecting a suitable rental property in the right area which doesn’t have too much competition can help to avoid this first potential pitfall.

The second major pitfall is that as a landlord you are responsible for the ongoing maintenance of the property. This will have to be taken into account in calculating the overall return and in some cases reduces it substantially or results in annual losses. For builders who can carry out any work themselves, this is less of a problem, but for Average Joe, costs can be substantial.

Mortgage interest rates are subject to change, and if rates rise in future, monthly payments will rise accordingly. It is important to factor in potential interest rate rises when working out if you can afford to borrow on a buy to let basis.

What else should I consider?

Tax – depending on the amount of income derived and your personal income position, you may need to pay tax on the income. Any gains on sale may also be subject to capital gains tax based on the rates and regulations applicable at the time of sale.

Insurance – As a landlord you will be responsible for insuring the building, and a specific landlord’s policy is advisable. A non-specific policy or a standard residential policy may be invalid.

For more information on Buy to Let mortgages and mortgage advice in Devon please visit http://www.hedgelandsmortgages.co.uk

Article Source:
http://EzineArticles.com/?expert=John_A._Smith

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