Buy-to-let mortgages that are one of the types of commercial mortgages act as the anchors of profit for the future. They are majorly used by the professional landlords and housing companies to buy the property and rent it out. The instalments or a big part of instalments is covered by the rental earning.
There are many aspects where the borrowers have confusion, are you also among them. Below are some essential points that can help avoid any doubt and take a correct decision on the mortgage.
How many buy to let mortgages can you have?
To increase portfolio, the professional landlords want to buy many properties to rent them out. As a result, they need more than one buy-to-let mortgage; in fact, they need many. But do they can in reality?
Yes, it is possible to take many buy-to-let mortgages if a professional landlord applies them because they apply through a company. There are real estate companies in this same business with hundreds of mortgages. However, the rule of affordability will apply always. Until the landlord can manage to prove repayment capacity, there is no precise limit of buy-to-let mortgages.
How Do you Buy-To-Let Mortgages Work?
In terms and conditions, a buy-to-let mortgage is different from a general residential mortgage. Here is how it works in terms and conditions.
Buy-to-let mortgages work primarily for commercial purposes and thus it a bit more expensive than the other mortgages. The landlord usually relies on the rental income to pay the instalments. The lenders know that the property will be used for commercial reasons, and renting out is part of a business.
- The minimum deposit amount for the mortgage is 25% of the property value. It is the minimum limit of a down payment on commercial mortgages.
The maximum can change in two conditions
1) When the borrower extends the limit according to his choice.
2) When the borrower has some financial issues like bad credit situation, and the lenders demand higher deposit as compensation to the risk.
- The repayment method of buy-to-let mortgages is interested only. It means it is in the form of instalments, the borrower pays only the interest part, and the principal is paid at the end of the term. Most of the buy-to-let mortgages are interest only.
- To get the mortgage, the rental income must be more than 25% of the mortgage payment. Depending on the financial conditions of the applicant, this limit can go up to 30/35%. But this is the maximum limit, and it usually does not go beyond that.
What Are The Affordability Rules of Buy-to-Let Mortgages For Lenders?
As you can understand from the above information that these mortgages are expensive, but the affordability rules are stringent. However, that does not mean rude always, but yes, they are uncompromised.
- The interest cover ratio test
The ICR is used by the lender to calculate the rental income in comparison to a representative interest rate. The rate is usually 5.5%.
- The financial details
The landlord needs to show the detail of the profit and loss ratio of its portfolio. Also, it is necessary to explain the business structure and cash flow estimations.
- The Heavy mortgage portfolio is not promising for lenders
A massive mortgage portfolio faces difficulty in qualifying for the funds. With already many other mortgages, a landlord cannot manage to get a new mortgage. If you are planning to borrow money, it is better to keep less number of mortgages. However, one important fact here is that if your payment history is impressive, the lender may not hesitate to lend you money.
Why Are Buy To Let Mortgages Interest Only?
You should know that any formal authority does not regulate buy-to-let mortgages. It is the reason that this mortgage follows popular culture. The reality is that the interest-only mortgage is much cheaper in instalments.
The repayments received are higher than the monthly instalment amount that contains only interest. The rest of the money gained in the rent can be invested in another project, renovation etc. by the landlords. You can say that due to the business reasons and the need for maintaining profit margins, most of the buy-to-let mortgages are interest only.
The above facets explain well the nature of buy-to-let mortgages. They facilitate the basic knowledge that is sufficient to create a base for any applicant. If you want to buy a property to rent it out, the facts can help you apply wisely.