October 24, 2022 12:40 pm

Insert Lead Generation
James Nicholson

Understanding how buy-to-let works and the strategies and challenges associated with a buy-to-let mortgage are important if you’re considering investing in rental properties. Here are the do’s & don’ts of buy-to-let mortgages!



What is Buy-to-let Mortgage?


Purchasing a property with the intention of renting it out and collecting rent is known as buy-to-let. These payments must be greater than the cost of upkeep, letting agent fees (if applicable), and monthly mortgage payments in order to turn a profit.

Buy-to-let (BTL) mortgages are frequently used by landlords who want to purchase real estate in order to resell it. There are some significant differences between the regulations governing buy-to-let mortgages and those governing regular mortgages.


How does buy-to-let mortgage work in the UK? 

When you purchase a property with the intention of renting it out and collecting rent, you are functioning as the landlord. These payments must exceed the cost of upkeep, letting agent fees (if applicable), and monthly mortgage payments in order to generate a profit.


How much can you borrow for buy-to-let mortgages? 

The most you can borrow is based on how much rental income you anticipate earning. Your lender will want to be certain that the rent you receive from your property will be enough to pay your mortgage and some extra.

Typically, lenders require that your rental income be 25–30% greater than your mortgage payment.

You can need a greater down payment if the loan to value (LTV) the lender wants is influenced if the rental valuation of the property is not high enough. Speak to local letting agencies or search internet rental listings to learn how much comparable houses are renting for to get an idea of what your rent might be.

How much deposit do you need for a buy-to-let mortgage?

Although it can range from 20 to 40%, the minimum deposit for a buy-to-let mortgage is often 25% of the property’s worth. The majority of BTL loans are interest-only. As a result, you only pay the interest each month and not the capital.


How to apply for a buy-to-let mortgage:

If you’re looking to apply for a Buy to Let mortgage, you’ll usually need a bigger deposit than for a residential mortgage. You’ll likely need at least a deposit of 25% of the house value.

How much you can borrow for a Buy to Let property will depend on how much rent you expect to get. Most lenders will want to see a rental income of 25% to 30% over and above your monthly repayments.

You’ll usually also need to provide all the usual evidence about your earnings and your finances. This includes your:

  • Deposit
  • Credit history and salary
  • Any debts
  • How much you’ll make from rent

You might also need the following documents:

  • I.D. such as a driving licence or passport
  • Gas, water or electric bills
  • Proof of existing mortgage statement
  • Proof of additional income
  • P60 form
  • Payslips for the last three months, or proof of income and tax returns if you’re self-employed
  • Bank statements for the last three to six months
  • Proof of your monthly outgoings
  • Details of the property you want to buy


Do’s & Don’ts on areas in buy-to-let mortgages: 




1. Preparing for your first purchase

  • DON’T: Think it will be simple money.
  • DO: Thoroughly research the market and take no chances at all.

Do extensive study regarding the area before making a purchase. What are the price trends in your area? Exists a strong demand among prospective tenants? How much money would you need to invest in order to earn a respectable return?

Additionally, keep in mind the obligations you will have as a landlord. You must offer your tenant a few essential services. Taxes must be paid on both your rental income and any capital gains made when you sell the property. Of course, there will also be ongoing expenses like service fees, ground rent (for leasehold properties), buy-to-let mortgage payments, cleaning, decorating, repairs, and renovations.


2. Choosing a property

DON’T: Purchase something out of convenience or “sight unseen.”
DO: Before you buy, research the area and property

There are several benefits to buying locally: you are familiar with the neighborhood, you can reach the home quickly in an emergency, and you might even know a few local landlords who can provide advice. However, you might need to look further afield if the market isn’t favorable.

Promising regions are ones where prices are low enough to invest in yet rising, where local facilities and transportation are excellent, and most importantly, where your desired renter demographic is in high demand (more on this below).

Never make an offer on a home you haven’t viewed. Self-inspect it extensively (or ask a trusted third party to do it, if attending the property is too difficult). Before you make a purchase, you should seriously consider asking an accredited surveyor to give it a professional review.


3. Determining the target market

DON’T: Think that a one-size-fits-all strategy is the best course of action.
DO: Choose a target market and make your purchase with that group in mind.

Different people have varying interests. It’s a misconception to believe that your two-bedroom apartment, which is a 30-second walk from the city’s entertainment core, will appeal to young families just as much as it will to a couple of young professionals looking to share.

Your target market should be your top priority when choosing a property because the neighborhood and the type of property will both affect the amount and kind of interest you receive.


4. Developing a business strategy

DON’T: Wing it!
DO: Take your time to carefully analyze your investment goals and how you will go about achieving them.

Buy-to-let investing is undertaken for a wide range of reasons, including future gains, a reliable income, and a combination of both. Your business plan will be greatly influenced by what you intend to accomplish. Your attitude toward risk and your “investment horizon” are two factors that are essential to this.

The length of time you have to make up any potential losses is referred to as your investment horizon. The longer the horizon of an investment, the less risky it is regarded to be because inflation is expected to eventually even out any short-term losses. This is especially important for retirees who are thinking about investing with their pensions because the investment horizon may be much shorter and a lower-risk strategy may be needed.


5. Financing the purchase

DON’T: Select the first mortgage you find.
DO: Compare prices to find the best offer.

Keep in mind that the best offer isn’t always the cheapest. Some mortgages have unique features, such letting you change at any time without paying exit costs (sometimes referred to as “early repayment charges”) or letting you use your savings to offset the loan and lower the interest you pay. Others are designed for particular types of purchases, like big multi-unit buildings or properties with numerous uses (HMOs).

Therefore, do your research before making a decision. Remember that expert buy-to-let broker guidance can be helpful in achieving the best deal if you are having trouble finding the right lender or just need assistance sorting through your alternatives.


{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}