Buying properties to rent them out can be a good investment if you proceed through the right steps. There are many arrangements to help those who buy for residential purposes, especially if they’re first time buyers. However, those don’t apply in your case if you’re buying a to-let. For that, you have to look for arrangements that are meant for your purpose.
Even though the basic rules are the same, you will find some differences. To-let mortgages are one of the options that you have. As their name suggests, they are meant to help you buy a property for renting it out. Before you proceed, there are a lot of things you have to consider. Since it’s a question of a big amount of money, you can’t afford to take any bad decisions.
So, here is all the information that you’ll need to avoid in case of buy to let mortgages.
How much would it cost to get one?
When you’re going for this type of mortgage, the first thing you might notice is their cost. You would find that it’s quite high as compared to other types. If you have taken out one for buying a home in the past, you’d truly know the difference, and here is quite an obvious reason why it is so.
The lender is taking a big risk by lending you money, or at least that’s how they perceive it because your earnings would depend on the tenants, which means it’s not stable. If very few people rent your property or nobody does in the worst case, you’ll have trouble repaying the money. As compensation for such a risk, the lenders will give you the loan at a comparably higher rate. This is why you need to invest wisely and in the right place.
As for the cost of the arrangement, you generally have to deposit at least 25% of that of the property at the beginning. In some cases, this might even reach up to 40%, depending on the lender. You might also have to pay a high cost for just arranging the mortgage.
However, they would generally require you to pay only the monthly interest throughout the term and the total borrowed amount at the end. This might make it a little easier for you to repay your lender.
How does this arrangement work?
Most of the procedures of other mortgages apply to the buy to let ones as well. The main difference is in the cost that you have to pay. Apart from that, there are a few smaller differences. One of the most noticeable ones among them is that most of them are interest-only.
Thus, this might provide you with some convenience as the lenders charge higher rates in this arrangement in general. Otherwise, you would possibly find it quite difficult to keep up with the instalments. You have to use this opportunity to its fullest to save up for repaying the full borrowed amount at the end. Otherwise, it won’t be worth it if you fall into debt.
You can also get this loan on a repayment basis where you pay the interest as a part of the principal amount, every month. There are quite a lot of lenders who will lend you on that basis if you prefer. Whichever method you choose, you have to do so after careful consideration and planning. Try consulting with a financial adviser who’s an expert in this matter. It can be more useful to you than you might think.
It must be pointed out here that there are no limitations put on how much lenders can charge for buy to let mortgages. However, this applies to you only, in case you’re renting the property to someone other than a close relative. Otherwise, they can’t charge you outside the affordable limit set by the Financial Conduct Authority.
Would it be suitable for you?
Needless to say, this arrangement won’t be suitable for all people. You must make sure that it would be the best option you have before you proceed with it. If you’re new to this, you might need some help with that. In that case, it is quite simple for you to make the right decision, if you consider a few things.
First, investing in this can be quite a risk. You must make sure that you understand it well and are prepared to take it. Otherwise, it would be better that you look at other options as well and decide which one would be best. Consult an adviser if you need help with this. In any case, it won’t be wise to proceed without being fully sure. It could have a disastrous result otherwise.
Do you earn below £25,000 annually? In that case, you shouldn’t go for this arrangement. You might wonder why you have to earn this specific amount. The reason is that seeing the cost of this mortgage, you would have trouble repaying your lenders if you earn any less than that. So, you must keep your income above this limit or maintain it. Otherwise, you shouldn’t go for buy to let mortgages.
Yet another consideration you have to make is your age. Are you above 70 years old? Then, chances are that your application will be rejected by the lender. You’ll be able to borrow only if your age is less than the maximum limit at the end of the arrangement. Generally, these arrangements last up to 20 years or even more than that. So, you must make the calculation, if you want to before it’s too late.
How do you get the Best Interest Rate?
Generally speaking, the lenders charge higher rates for this arrangement as compared to other ones. So, the cost is already too high, you’d want it to be the lowest. You can say that it is in your hands to an extent, even though that may not always be the case.
Here is what you can do to make sure that you get the loan at the best interest rate possible:
Borrow as less as possible
It is quite obvious that the lesser you borrow, the lesser will the lender charge because they would see it as being less risky. This is one of the ways you can make sure that you get the loan at a favourable rate.
Keep your finances in good health
When you apply to a lender, they would surely consider your financial condition. It would play a significant role in how much you’re charged. So, you would want to keep it in good shape to get a good rate. If you can improve it, do so by all means. The better is your financial, the more the lenders will consider charging you, according to what you’d find affordable.
Maintain a good credit history
One of the most important aspects to lenders would be your credit file. They would be able to get a good idea of how much to charge you using this information. Moreover, you have to give them access to it if they ask which they surely will. The lesser it shows a record of trouble in paying debts, the better.
If you’ve been insolvent or bankrupt and the lender asks about it, you’ll have to tell them, even if it has been removed from your file. In such cases, it may become quite difficult for you to borrow at a good rate. You might be able to change that if you explain that you’re in a much better financial condition currently.
Investing in property wisely
When you take out this type of mortgage, the lender would want to make sure that you’ll be able to repay them. For that, they have to take into account whether the property you’re buying would pay off enough for the repayment. To be sure that it does so, you have to invest wisely, like other financial matters, you can take the help of an adviser for this one as well.
What risks do you have to face in this arrangement?
From what it seems, the entire idea of buying a property on a mortgage to rent it is quite risky. You can’t make mistakes in such a serious matter. So, you need to know about the risks that you’ll come across. The very first one that you might face is that you’re not getting any tenants. This is a commonly faced problem for people in your situation. It would probably go away some time, but there’s no guarantee that it’ll never return.
Your income from the rent may keep fluctuating. So, you would need a good amount of savings to cover the repayments when you are having low earnings. You’ll face another big risk in case you have to sell the property for repaying the loan. As you know, the value of properties keeps changing. In case it drops, you are required to sell buy to let mortgages, which might get you in trouble. To prevent it, you have to keep the repayment covered in some other way.