Buying a property and then renting it to a tenant is proving to be a popular choice amongst buyers. The perfect solution is to rent the property at a price, which covers your monthly mortgage payments. This way, the payments are paid each month and the landlord benefits from having a property, which will increase in value. It may be though that the monthly rental charge does not cover that of the mortgage payments and so a certain percentage of funds may need to be financed by the owner.
A ‘buy to let’ mortgage can also be referred to as an investment mortgage. You are essentially buying a property that you will rent to a tenant for the purpose of making perhaps a small profit via the rent (remember that rental properties have to be maintained) and hopefully through accrued equity later on. A buy to let mortgage may well have specific restrictions and conditions attached to it that need to be studied.
Some look at a buy to let as a way of earning additional income each month whereas others are more interested in the long term aspect, which may see the property increase its capital.
An example of a possible restriction is the assumed rental income. Some lenders may require you to prove that you can secure the appropriate amount of rent to at least cover the mortgage payment. The buy to let mortgage is not based on the applicant’s annual income.
In terms of qualifying for a buy to let mortgage, the lender will base their decision on the potential rent that will be paid by a tenant (the current market value for the type of property, area location etc) and maybe also your current income.
Where buy to let mortgage slightly differ from that of standard mortgage is that they generate higher levels of interest rates and that a bigger deposit is required. This may be between 20% and 25% of the property value.
Becoming a landlord and setting up a buy to let mortgage also has its downfalls. The element of risk increases because there needs to be a tenant in the property in order for the mortgage payments to be made. Also, being a landlord means that you will be required to do certain things, which may be time consuming and involve costs. These include:
• Maintenance; exterior, décor, appliances and any other issues the tenant may have.
• Dealing with estate agents; finding fees, management and admin fees.
• Dealing with the relevant service charges (part of this will no doubt be covered by the monthly rental from your tenant but it is the responsibility of the landlord to deal with this).
• Insurance; legal, building, home and contents.
It is advisable that you seek advice from your local estate/letting agency so that you can understand what type of properties is currently popular to tenants. Having a university or college nearby may also attract students and tutors. Other factors such as ease of public transport will also be a good selling point.
If you have any further questions regarding the payment amount you need in order to obtain a ‘buy to let’ mortgage, you should use an online mortgage calculator. A mortgage calculator will take data you input and calculate out the payment a loan would need. For example, if you are looking at a property as an investment that is say £200,000’s, you need to find out how much rent you may be able to obtain each month for such a property in such an area. Look around local agents to see what rental amounts are being charged in that locality. By using the mortgage calculator for the loan length, current interest rate, and the amount of the purchase, you can obtain the rent figure you would need to make to completely cover the mortgage repayment. If the current possible rent is below the mortgage calculator answer then you would need to either offer more of a deposit or find a less expensive property to invest in.
