Low returns on savings accounts and a volatile stock market have boosted the attractions of buy-to-let property as an investment option. Landlords in many parts of the country are also enjoying increasing demand from tenants, who are struggling to afford a deposit on their first home and remaining in the rented sector. Competitive mortgage rates add an extra shine to the buy-to-let proposition.
Mortgages for landlords
If you are thinking of buying a property to let, the mortgage is one of the most important considerations. You cannot take out a standard residential loan, but many banks and building societies offer buy-to-let mortgages, specifically for landlords.
Bigger deposit for buy-to-let
A buy-to-let mortgage is similar in many ways to a standard home loan. However, there are some important differences. For a start, the interest rate is normally higher. You will also have to put down a bigger deposit on a buy-to-let property - a minimum of 25% is the norm, although many of the best deals demand 40% or more.
Then there's the affordability calculation. Banks and building societies assess your personal income when they are working out how much you can borrow on a residential mortgage. With a buy-to-let loan, they look at the expected rental income - and most lenders insist that the annual rental income must at least equal 125% of the annual mortgage interest payments. So, if you are paying mortgage interest of £15,000 a year, your rental income should be at least £18,750. If you're mortgage interest costs were £20,000, you'd be looking for rental income of £25,000 or more.
The strict conditions reflect the greater risk of buy-to-let loans, as the statistics show that borrowers are more likely to default on a buy-to-let than a residential mortgage.
The required rental income buffer on top of the mortgage interest due is also there to allow for a period of vacancy between tenants.
Do you qualify?
There is usually a list of other eligibility criteria. Most banks and building societies insist on a minimum age, often 25, plus a minimum income, usually around £25,000. You are not normally allowed to take out more than three buy-to-let loans and there will be a cap on the total amount you can borrow, though it could be £2 million or more.
Choice of mortgage deals
You can usually choose between a range of mortgage deals, including fixed rate and tracker loans. Arrangement fees also apply - and they can be high, typically more than £1000. Many landlords prefer a fixed-rate mortgage so that they can budget with more certainty. But tracker loans are often cheaper, if you are happy to cope with fluctuations in the cost of your mortgage.
Most buy-to-let loans are interest only, not repayment. In other words, you pay only the interest each month and clear the capital debt when the property is sold. There are several advantages to an interest-only loan if you are buying a property to let. First, the monthly payments are cheaper than a repayment mortgage. Plus, you can usually offset the mortgage interest against your tax bill.
Of course, the downside is the lack of capital repayments to reduce your outstanding debt. This can be especially tricky if house prices are flat or falling as it raises the possibility that you won't generate enough to clear the mortgage from the proceeds of the sale.
Do your sums
There are risks involved with buy-to-let investments. You have to be confident that you can cope if your property is void for any period, or if your tenants prove to be unreliable. You also have to make sure the sums add up, bearing in mind that both rents and house prices could come down.
Find the best buy-to-let mortgage deal
Would-be landlords who are in search of a buy-to-let mortgage can compare hundreds of deals using MoneySupermarket's free independent comparison service. We cannot help you to find the ideal tenant, but we can make sure you have the ideal mortgage, all at the click of a mouse.