Buy To Let Mortgage Guide for the Novice Investor

Over the past five years buy to let lending has grown massively, now accounting for up to 12% of all mortgages in the UK. The rapid growth in the market has led to many mortgage lenders offering specially designed buy to let mortgages at very competitive rates.

With house prices stabilising and mortgage lenders becoming more cautious, it is essential all potential landlords know the ins and outs of taking on a buy to let investment. Read our guide below to find out more information on buy to let mortgages.

How does a buy to let mortgage differ from a residential mortgage?
The main difference with a buy to let mortgage is that unlike residential mortgages, they are generally not based on the applicant's salary. Instead they are calculated against the monthly achievable rental income for the property, known as the "rent-to-interest" cover. As such the rental income must be greater than the mortgage repayment.

In the past mortgage lenders have stipulated a rent to interest figure of around 130%, meaning the monthly rental income exceeds the monthly mortgage payment by 30%. However due to higher interest rates many lenders have reduced this requirement and will offer mortgages on properties with 100% rent to interest cover – i.e the rental income is equal to the monthly mortgage repayment. Such investments often bring an increased risk, and as such a higher arrangement fee.

How much can I borrow?
As with all mortgages, how much you can borrow depends on the lender and your circumstances. As a guide the maximum ranges from £150,000 to £1 million per property, and historically lenders will only allow you to borrow up to 85% of the property value. As such you will need a deposit of at least 15%, but if you can put down a greater deposit you should be able to secure a more competitive mortgage product.

Again, due to tougher market conditions lenders are relaxing this criteria and some lenders will offer mortgage products at higher loan-to-value rates. Be aware that a large deposit gives you a financial buffer against negative equity, so only well-informed and experienced landlords should take on this kind of risk.

Where shall I invest?
When choosing a buy to let property it is crucial to thoroughly research the area, transport links, schools, jobs and any other factors which may affect your rental income. Choosing the right property in the right area will ensure your property will rent quickly and easily, thus avoiding empty periods. For this reason it is never a good idea to invest in a property you have not seen, in an unknown area. It is also important to understand the rental income and resale values of all potential investments,

Be wary of new build city centre flats which have flooded the UK property market recently. The huge availability of such properties has led to the loss of both capital and rental income for many investors. As such some lenders refuse to lend on new builds all together, or demand a substantial deposit of 25% or more in order to guarantee some equity in the property.

Good things come to those who wait..
A buy-to-let investment should be entered into with long-term goals in mind. In the present climate you are unlikely to make any sizeable earnings from rental income alone, therefore you need to be aiming for long-term capital growth. In optimum market conditions you may see a much faster return on your capital, but many experts agree you should expect to wait up to 15 years to see a reasonable return on your investment.

Looking for landlords insurance? ISIS Insurance offer comprehensive cover at very competitive prices. We go to a panel of the UK’s leading buy to let insurance specialists on your behalf, saving you both time and money. For an online Landlords Insurance quote click here or alternatively you can call us on 01625 539 656

Posted by Holly on 07/02/2008