A buy to let Mortgage is used for the purpose of buying a house and then renting it to private tenants (full guide on renting to private tenants here).
The Advantages of Buy to Let Mortgages are:
- Create a regular monthly income which is hopefully higher than monthly mortgage payments and costs
- Create an opportunity for Equity Growth. The UK housing market has consistently outperformed the inflation, the stock market and an ordinary savings account. The potential for further growth may be limited but generally investment in the housing market is seen as less risky.
Increased Popularity of Buy To Let Mortgages
Buy to Let Mortgages have become more popular in recent years. This is due to
- Low interest rates. Since the mid 1990s the average UK interest rate has been much lower than the average in the 1980s. This has made it more profitable to enter into the buy to let mortgage market
- Strong growth of the renting market. Due to rising house prices and shortage of supply. The cost of renting has been increasing above the rate of inflation
- The ARLA (Association of Residential Letting Agents), has created a scheme called the Buy-to-Let initiative. This involves giving advice to potential buy to let buyers. It can make recommendations about best buy to let scheme and the best way of getting value from your investment
Potential Problems with Buy to Let Mortgages
- Rising interest rates. If interest rates rise then it can decrease the profitability of buy to let mortgages. Generally a rise in interest rates does not increase the price of renting, but it will increase a landlords monthly outgoing.
- Falling house prices. Recently there has been a lot of speculation that UK house prices are overvalued. The price of houses has risen faster than earnings. This has decreased the affordability of buying a house. If house prices were to fall, home owners would loose out on their investment. However if buy to let is considered as a long term investment then temporary falls in house prices will not be a problem.
- See: will UK house prices fall
Guide to Buy to Let Mortgages
- Rentable Income should be 130% of monthly mortgage payment. This is because in addition to cost of mortgage interest payments. Landlords will have other costs such as:
- Decoration and repairs.
- Landlord building insurance.
- Cost of getting tenants.
- Also there are likely to be time periods when the house is empty because tenants move out.
- The most successful buy to let investors buy in their local area. This gives them local knowledge which is important in getting the best deal.
- Make sure you take advantage of tax savings from updating the property
Buy To Let Mortgages for Self Employed
There is no reason why the Self Employed cannot enter into the buy to let mortgage. However generally a deposit of 15% to 20% is required. With a substantial mortgage a self certification mortgage could be used to take out a mortgage.
Buy to Let Equity Savings.
A significant number of private landlords have zero mortgage or a very low % of mortgage. Therefore they have a lot of unlocked capital in the houses that they own. This equity can be released through Remortgaging, giving the opportunity to buy more houses.