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Our guide to help with those first steps to becoming a buy-to-let landlord.
Looking to become a landlord but not sure what this entails? Our guide gives you the low-down.
A buy-to-let mortgage is when a buyer purchases a property with the intention of renting it out to tenants. Some landlords do this as part of an investment strategy, but increasingly it is individuals changing from a residential mortgage on their own home, to a buy-to-let mortgage when they move out (perhaps to move in with a partner or during a period of working abroad).
Buy-to-let mortgages are very similar to a mortgage on your home, with fixed rates and trackers available. However, you should expect higher arrangement fees, as well as a different way of assessing whether you are eligible for the mortgage.
Most mortgage lenders link whether you can afford the mortgage to the rent you are charging or propose to charge. Generally speaking, you'll need the rent to be at least 125% of the mortgage payment in order to satisfy your mortgage lender, but you should check carefully before making an application that you will be eligible, as a significant number of lenders have more stringent affordability requirements, especially for higher rate taxpayers.
Remember too that while the lender may consider the mortgage affordable, you need to be happy it is too. Lenders don't factor in the other costs of running a buy-to-let property, such as insurance, agent's fees and other maintenance costs.
Two-year fixed rate mortgages can provide the security of fixed regular payments while still giving you the ability to remortgage after two years.
Fixed rates are great if you want to know exactly what you are paying for a set period. Specifically, in terms of buy-to-let they can be a great way to manage your costs. Sometimes fixed rates aren't as cheap as the best tracker rates available to landlords, but they do offer the certainty that your payment will not increase for two years.
When you apply for a buy-to-let mortgage, your lender will perform certain checks to make sure you can afford the mortgage before they offer it to you. Their decision will be based on:
This will vary from provider to provider, and will depend on your chosen loan-to-value (LTV) and deposit size. However, a two-year fixed buy-to-let mortgage will usually come with higher interest rates than a residential mortgage of the same duration. They may also have higher application fees and often require deposits of at least 20%.
With short-term fixed rates, you should also consider the costs of remortgaging your buy-to-let property regularly. When your fixed rate period comes to an end your mortgage will usually switch to your lender's buy-to-let standard variable rate, or possibly a tracker based variable rate. This is likely to be higher than your fixed rate, so if you don't remortgage, it's important you have enough manoeuvre in your budget to absorb the higher mortgage costs. Remortgaging will involve paying new mortgage fees and possibly legal fees if you move to mortgage to a different lender.
Make sure you know the rental coverage for your buy-to-let property. Different lenders may set different minimum requirements and this may be different dependent on your tax status.