With pensions no longer guaranteed to see us through to old age, many are now turning to property investment to secure their futures. With buy-to-let now a popular way of building a property portfolio, here is a quick guide to the mortgages available.
This article covers:
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How much deposit will you need?
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Spreading the risk
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Finding the right mortgage
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Interest rates on buy-to-let mortgages
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How much can you borrow?
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Getting the right cover
How much deposit will you need?
Your deposit on a buy-to-let property will be higher than is required on a mortgage on your main residence. Lenders used to demand a deposit of between 20% and 30% of the purchase price, but you can now get a buy-to-let mortgage with a deposit as low as 13% (according to current market products).
Spreading the risk
Experienced landlords tend to resist ploughing all their savings into a single property and putting down the biggest deposit they can afford. Instead, they prefer to put down the minimum deposit to secure the borrowing and put any savings they have left over towards their next property. This enables them to build up a portfolio of properties, so spreading the risk.
Finding the right mortgage
An independent mortgage broker who specialises in buy-to-let products can find the right mortgage for you. One advantage of a broker is that if you accumulate several properties they can help structure your financing so that it is as cost-effective as possible. This may mean remortgaging several of your buy-to-let mortgages to the same lender in order to gain a preferential rate of interest, for example.
Interest rates on buy-to-let mortgages
Many lenders offer a range of competitive deals and charge interest not much higher than you'd pay on your main residence. Like other mortgages, fixed-, discounted- and tracker-rate products are all avaiable. Most landlords opt for interest-only rather than repayment, as the monthly payments are cheaper and can be offset against rental income.
The landlord doesn't need an investment vehicle to pay off the capital at the end of the term, instead selling the property (or another in their portfolio) when the lender requires the capital to be repaid.
How much can you borrow?
Unlike the mortgage on your main residence, buy-to-let lenders calculate the amount you can borrow based on rental income rather than earnings. The lender will want to be satisfied that the property more than pays for itself. Traditionally, lenders required 130% rental cover, so the rent needed to be at least 130% of the mortgage.
For example, if your mortgage is £600 a month, the property must be capable of generating a minimum of £780 a month in rent. This ensures that the mortgage is paid and you have something left over to cover costs and maintenance, as well to cover periods when the property is empty.
Getting the right cover
With the buy-to-let market slowing, rental yields falling and landlords struggling, a number of lenders have relaxed their criteria, reducing their rental cover to 120%, 110% or even 100% of the mortgage payments. While such deals may be tempting, ensure you don't overstretch yourself. If your rent only just covers the mortgage, you will have to dip into your pocket to cover other costs, and there won't be anything to tide you over during void periods.
Also, if you opt for a loan requiring just 100% cover, you may pay a higher rate of interest than you would with higher rental cover, resulting in greater monthly repayments.
This article was last updated on 20th September 2006