NOT QUITE LIKE THE MONOPOLY BOARD

THE INS AND OUTS OF BUY-TO-LET MORTGAGES FOR BEGINNERS.

 

There is a lot to talk about when you are considering being a landlord. So, let’s look at what generally motivations people to consider a buy-to-let mortgage and how it differs from the more traditional residential mortgage.

 

Buy-to-Let Mortgages

It’s easy enough in Monopoly, you buy a couple of plastic houses and then the other players pay you rent. Simple, right? Well, real life is very different of course. There is real money involved so people rarely go into property on a whim. A buy-to-let mortgage is a big investment and it needs to be considered properly because, just like the more common residential mortgage, a buy-to-let, is a long term financial obligation.

 

I suppose the most common reasons people consider buy to let mortgages are that they have come into money and are looking to invest in property, or they have some personal circumstances that make it the most viable option. Common reasons are marriages where both partners have property. Another is a need for relocation. Sometimes inherited properties may be being sold and the money re-invested.

 

Whatever the background motivation though there are some good reasons to consider renting.

 

Investment:

In an uncertain financial market, property investment is a tangible asset, and providing you are prepared to allow it to mature, one of the safest options there is. For many investors it’s seen as a reliable way to diversify investment portfolios and secure long-term financial stability.

 

Rental Income:

Demand for rented property is very high in a lot of places and through the roof (if you will pardon the pun) in some. High demand means owning a rental property can provide a steady stream of income. This is particularly true in urban and student areas, where the rental market is particularly robust. Naturally the sort of property, location, facilities, and other factors will make a difference.

 

Property Value Appreciation:

Over time, property values generally increase. This potential for capital growth makes buy-to-let an appealing long-term investment.

 

Pension Planning:

Many investors see buy-to-let properties as a way to partially fund their retirement. This is an important decision, and you need to take advice, but many people see it as a more controllable way to help fund a pension pot.

 

There are many other reasons why people consider buy-to-let properties. As always it is about your personal circumstances and what is right for you. Once you’ve decided to look onto buy-to-let, you can move on to the mortgage.

 

Buy-to-Let vs. Residential Mortgages: What’s the Difference?

If you are considering one, then you need to really understand the difference between a standard mortgage and a buy-to-let. Essentially a mortgage performs the same function regardless of why you are taking it. It funds the property it is taken out against. You then pay the lender back with interest. There are some key differences between the two mortgage types though, and understanding them is crucial for anyone considering stepping into the property letting market.

 

Purpose and Usage

This is pretty much as it says on the tin. A Buy-to-Let mortgage is specifically designed for properties you intend to rent out. A residential mortgage is for a property you plan to live in. As a rule of thumb, you should never rent a property you don’t own outright unless it is on a buy to let mortgage. Most mortgage terms and conditions forbid renting so, unless your mortgage lender has agreed you can do so, you could be committing mortgage fraud.

 

Interest Rates and Fees

There is a common belief that buy-to-Let mortgages can have higher interest rates and may require a larger deposit than residential. Like any mortgage, it is about the current market and understanding where the best options are. We will look at these for you and advise on the best option.

 

Affordability Assessment

This is probably the biggest fundamental difference when it comes to applying for, and being granted, a buy-to-bet mortgage. With a residential mortgage your personal income, credit status, expenditure and so on (see our other articles for details) will be the main criteria. With a buy-to-let mortgage the lenders will usually focus on the potential rental income from the property to assess affordability.

 

Tax Considerations

Buy-to-Let: You’re liable to pay income tax on rental income and could be subject to Capital Gains Tax if you sell the property for profit. However, certain costs like mortgage interest could well be offset against rental income. The tax situation has recently changed and could well change again in the next budget, so let’s talk about this.

 

Flexibility

There can be less flexibility in terms of living in the property with a buy-to-let. Which is really only fair, because after all you not living there was sort of the point. If you decide to move in, you’ll need to switch to a residential mortgage. If you do decide to move in there is likely to be plenty of time to work things out, just as long as you call us as soon as your circumstances change, we can help.

 

Final Thoughts

Moving to a buy-to-let mortgage and becoming a landlord can be a smart financial move. It could offer diversification of your investments, a potential income, and a hedge against inflation. In contrast, a residential mortgage is sometimes simpler more affordable. So, while it obviously doesn’t offer an income, as we know, property is one of the most reliable investments regardless of whether you live in it or not.

 

Before making a decision, it’s vital to consider your financial situation, investment goals, and willingness to take on the responsibilities of being a landlord. Property investment can be rewarding, but it’s not a one-size-fits-all solution. If it looks like something you are ready for, call us and we can talk about your mortgage options.