The mortgage has always been a complicated subject due to the involvement of a significant amount. Borrowers still have a long list of questions as well as doubts on the formalities, what is right & wrong. Knowing the basics can solve many purposes and can facilitate better decisions.
Here the subject in the core is the ‘buy-to-let mortgage’, which of course can relate to many out there. The introduction to the fundamentals can help to wipe the doubts off and have clear picture devoid of confusion.
Definition – Always wins the first place in the sequence
A buy-to-let mortgage is a type of home loan product that people apply to buy a property that they want to rent out. The purpose of such borrowers is to buy the property for an investment that can give lucrative returns.
Are these different from ordinary mortgages?
More or less the buy-to-let mortgages are the same, but a few differences exist. They can get clarity through the following points.
- The buy-to-let mortgage loans are more expensive than the other ones. The reason is the higher interest rate and fees & charges. For example, the arrangement fee can start from £2000. But this is not the final amount and may vary from the lender to lender. The cause behind the high rates is the bigger risk for the mortgage provider. The landlord expects to cover the instalment from the rental income.
- The deposit size of BTL that lenders expect from the borrower is much larger than the other ordinary ones. Contradictory to 5% of a general deposit amount, the borrower needs to provide a 25% deposit. The best percentage that the lenders prefer is 35%.
The BTL mortgages are of two types –
- (1) Interest-only and
- (2) Repayment based.
However, usually, the deals are of interest-only mortgages.
- Unlike the other types, a major part of the Buy-to-let mortgage industry is not regulated by the FCA. If the borrower wants to let the property to a family member, then the formalities take place according to the general rules. The affordability factor comes in the core to play the prime role.
- The newly constructed homes are considered more risky and also the location matters a lot. The reason behind this is easy to understand. The finance companies are not sure if the new home will be easy to rent out or not. In case the property remains unoccupied for long, the instalments may get delayed.
- As the BTL properties are considered risky, the lenders demand from the borrower to prove the market rate for rental income. Normally, if the rate is 125% of the loan repayments, the approval comes smoothly. However, not all the lenders follow the same culture and act a bit flexible on this part. An established broker with a good knowledge of the market trends can bring a comparatively less expensive deal.
- Do not just focus on the headline rates and the other fees come additionally once the discussion on deal takes place. As the BTL is higher in total cost, it is necessary to keep in mind this fact and avoid shocking experiences later.
- You may need to pay a higher Capital Gain Tax (CGT) of 18%. In the case of other properties, you need to pay only the basic rate that is 10%. The prices change every year, and it is better to confirm from the mortgage provider on this part before you make a final decision.
The above things are basic but very important, as the base is necessary for any property to stand firm. Isn’t it? The buy-to-let mortgages are available in the market in abundance. However, as you know, they are expensive, be sure about your decision. In case, things do not work in the desired manner, and the delay in repayments happens, degrade may occur in credit score performance.