Rent must exceed the repayments for a number of reasons

It is not always possible to guarantee tenant occupancy for 52 weeks of every year and sometimes repairs or refurbishments may be needed. Gas boilers need to be serviced each year, and legally they must have their safety assessed by a qualified engineer. If the boiler stops working, then it may need expensive repairs or even replacement and a landlord must have a way of covering unforeseen costs of this type.

It is generally necessary to have some cash put aside to take care of emergencies. You will also need additional funds to cover the cost of stamp duty, which is higher when buying to let, more so as your portfolio increases.

When looking for your mortgage, you can, of course, approach banks, or even look online. However, mortgage brokers such as The Mortgage Hut, which specialises in the buy to let field will have a better idea as to what is available and can provide more informed advice on the best way to proceed, especially if your personal circumstances are a little different from those that lenders hold up as the ideal.

Once you have secured the property, there may be tax issues to consider as well, including the income generated each year and any profit on eventually selling the property which may be subject to capital gains tax. We would recommend that you consult a tax adviser in this regard.

How do buy to let mortgages actually work?

A buy to let mortgage is designed for the landlord or homeowner who wants to acquire another property and put tenants in it in order to generate rental income and capital growth. In general, a mortgage of this type operates much as the usual residential mortgage, but with a few key differences. It is important to understand these differences and when planning to get a buy to let mortgage or finding the best buy to let mortgages, it could be worth enlisting some expert assistance to speed up the process and to avoid the common pitfalls.

Where do I start?

In theory, just about anyone can buy a property to let, provided that they fulfil certain criteria. First of all, a mortgage of this type is an instrument for investing in a house or a flat that you will not be living in yourself. Therefore, you need to have considered all the ramifications of investing in the property market and any risks that this might involve. You may need to own your own residential property, whether still mortgaged or fully paid for.

Ideally, when embarking on a buy to let venture, your personal debt and finances will be managed well, as large personal debts can deter some lenders.

  • A good credit record will always be a benefit when looking for any kind of mortgage.
  • A stable income is also a prerequisite, usually in excess of £25,000 annually.
  • Many lenders are wary of prospective mortgagees who cannot demonstrate how they will make their repayments each month.
  • The age of the applicant can also play a role in being approved for a mortgage. Most lenders want applicants to have reached a maximum age of around 75 on completion of the mortgage term. So if you are 60 and applying for a buy to let mortgage, the term of the mortgage would probably be only 15 years or so. It is not always easy to line up a mortgage when you are on the verge of retiring.

How much can I borrow?

This is the part where doing your sums really matters and using a buy to let mortgage calculator will make this process easier. A knowledgeable mortgage broker can also help you to assess your options and can quickly put your particular variables into a buy to let mortgage calculator in order to determine what kind of loan you can realistically expect.

There are other factors to bear in mind when looking at a buy to let investment.

  • The mortgage you get will probably incur higher fees than those you would pay for a residential mortgage.
  • The deposits tend to be larger as well. Individual lenders vary as to what they require, but the minimum deposit is usually around 25 per cent, and can even be as high as 40 per cent of the asking price.
  • Many mortgages for buying rental property are interest only, which means that the monthly repayments can be lower but then you will still need to find the amount you originally borrowed at the end of the mortgage. 
  • There is also the option for a repayment mortgage when buying rental property if the projected cash flow from the rental income can cover it.
The amount you can borrow is inexorably tied to how much income the rental property will generate.

Many lenders expect the rent from the property to be between 25 per cent and 45 per cent higher than the repayment you make on the mortgage each month. It is important to get an accurate assessment as to what rent you can hope to achieve.

Do this by looking at listings for similar properties in the same area and same type of situation and see what tenants are willing to pay. This is one factor determined by market forces, so it is vital to know where those market forces are heading. If your buy to let flat is on a busy road, it may not bring you the same amount of rent as a flat around the corner on a quiet, tree-lined street.

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