Some buy to let mortgages are not regulated by the Financial Conduct Authority.
Over recent years many people have turned their backs on the stock market, preferring to invest their money in property in the hope that it will either provide a level of income or capital growth over the medium or long term or both, giving them some additional financial security for their retirement which is controlled by them and not a fund manager.
- Mortgages for landlords
When buying a property to rent out, the mortgage is possibly the most critical factor. You cannot take out a typical residential mortgage. However, most banks and building societies offer buy-to-let mortgages specifically for landlords.
- Higher deposits for buy-to-let
A buy-to-let mortgage is comparable in most ways to a residential mortgage. However, there are some differences. Firstly, the interest rate is typically higher. You will also be required to supply a larger deposit on a buy-to-let mortgage – a minimum of 25% is usual, although many of the most competitive mortgages demand 40% plus, this is due to the lender considering this type of lending as higher risk when compared to a normal residential mortgage commitment.
- Rental income
With a buy-to-let mortgage, lenders look at the expected rental income and don’t just assess the mortgage on your personal income, as they would with a residential mortgage. Typically lenders insist that the monthly rental income must equal 125% of the monthly interest payments at 5% to 6% payrate coverage. For example, if you are paying mortgage interest of £400 per month, your rental income should be at least £500 per month.
The tougher conditions reflect the higher risk of buy-to-let mortgages, as statistically borrowers are more likely to default on a buy-to-let mortgage than residential mortgages.
- Are you likely to qualify?
Most banks and building societies insist on a minimum age, often 25. Also they often require a minimum income, usually around £20,000 to £25,000 per year. Each buy-to-let lender has their own restrictions on how many buy-to-lets they will allow you to have, and other factors which they assess before they accept an application.
- Choice of mortgage deals
The choice will typically include fixed rate and tracker mortgages. Arrangement fees often apply – and they can be much higher than residential mortgages. Sometimes these fees can be fixed or charged as a percentage of the mortgage amount, other incentives can be offered, for example free valuations or Legal Fees paid by the lender and in some cases cash backs to help cover the new set up costs.
- Buying a property is only the first step
Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong.
If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service.
Select a shortlist of agents big and small and ask them what they can offer you.