In most cases buy to let mortgages are more expensive than normal residential loans. This is because lenders feel that there is greater risk of the borrower not being able to repay the loan. The reasoning behind this is that the property may have periods when it is standing empty, or the tenants are unable to pay their rent. There are also significant costs involved in being the landlord of a property, such as dealing with repairs and other major maintenance issues.
However, if the market conditions are right and you have found the perfect property, once the financing is secured there is every possibility that you stand to make a good profit in the long term with a buy to let property.
Getting the financing in place is the most crucial aspect of a buy to let property’s return on investment. With the right mortgage deal in place, you will be in a strong position to make money from your property, but it is not as straightforward as getting a mortgage for your own residential purposes.
Buy to let mortgage costs
In the first instance, you can expect to pay a larger deposit on a buy to let mortgage than on a normal residential loan. For most lenders the minimum is 25% of the property’s value, meaning that the loan to value rate will be 75% at the most. On top of this you can expect to pay an added 1% to 2% interest on loan repayments, compared with a standard mortgage – and this applies to fixed rate and tracker mortgages as well as lenders’ standard variable rates. To get the very best deals on loan repayments, with the lowest interest rates, you will need to have a deposit of around 40%, i.e. a loan to value rate of 60%. Other expenses to factor in include arrangement fees, which can total £2000 in some cases.
Covering the repayments
Before agreeing to give you a buy to let mortgage, lenders will need to be reassured that you will be able to cover the repayments. One way they do this is to insist that the rent you will be charging is in excess of the loan repayments: a typical starting point is 125%. As long as you are earning comfortably more from the property than you are paying back in loan repayments, lenders will feel more confident that you will still be able to make payment, even when the property is unoccupied.
Do your sums
A standard way of assessing whether or not a property is worth investing in is to calculate its rental yield – this is the annual rent you are earning on a property, divided by its value, and expressed as a percentage.
So, a property that costs £200,000 to buy and is rented at £1000 a month, or £12,000 a year, will have a rental yield of 6%.
Assuming you have to repay a buy to let mortgage, depending on the interest of the loan repayments, this could come down from 6% to 2%. On top of this, you will need to factor in other expenses such as income tax and keeping some money to one side to cover any emergency repairs.
Looking at the potential profit a property can make you in this way illuminates the importance of getting the most advantageous deal on your buy to let mortgage, and this means starting with as big a deposit as possible.