What distinguishes a buy-to-let (BTL) from a residential mortgage? It’s a valid question. While they share similarities, a residential mortgage isn’t for investment properties, and a buy-to-let mortgage isn’t for personal residences.
What is buy to let mortgage?
A buy to let mortgage is specifically designed for properties intended for renting. If you intend to lease your property, a buy to let mortgage is essential. While it shares similarities with a standard mortgage, where you borrow a substantial sum for a defined period, there are significant distinctions to consider. Given that you won’t reside in the property, it entails specific nuances.
How buy to let mortgages work?
One notable distinction lies in the fact that the majority of buy to let mortgages operate on an interest-only basis. Consequently, your monthly payments solely cover the loan’s interest, leaving the principal amount untouched. While this results in lower monthly payments, you must be prepared to either settle the entire loan, sell the property, or refinance at the mortgage term’s conclusion. Essentially, you can purchase the property, generate rental income for the agreed term (e.g., 25 years), and subsequently repay the mortgage by selling the property.
Repayment mortgages, where both capital and interest are repaid in monthly instalments, are infrequent in the realm of buy to let properties. Implementing such a mortgage would necessitate charging higher rent to cover the increased monthly cost. Nonetheless, this arrangement grants flexibility at the mortgage’s end, allowing you to continue renting and retaining the full rental income or selling the property without mortgage obligations.
Another pivotal disparity between residential and buy to let mortgages pertains to the borrowing amount. In the buy to let context, your borrowing capacity is determined by the projected rental income, not your personal income. Therefore, if the property boasts size or an ideal location, you can command higher rent, consequently securing a more substantial mortgage.
The third distinction lies in the deposit requirement. Buy to let mortgages are perceived as riskier by lenders, leading to a common stipulation of a larger deposit, typically around 25% or more. Similar to standard mortgages, a larger deposit enhances the attractiveness of mortgage offers, so it’s advisable to provide the most substantial deposit possible.
Are buy to let mortgages more expensive than residential mortgage?
Indeed, buy-to-let mortgages can be costlier than regular residential mortgages. This is primarily because they usually require a larger upfront deposit and might entail higher interest rates, leading to higher monthly payments. Additionally, being a landlord comes with extra expenses like agent fees, legal costs, maintenance, and increased taxes (both income tax and stamp duty).
What’s the difference between a buy to let and residential mortgage?
A residential mortgage, also known as a buy-to-live mortgage, is a loan provided by a mortgage lender for the purpose of acquiring a home for personal residence. On the other hand, a buy-to-let mortgage is a loan obtained from a mortgage lender to acquire a property that will be leased or rented to other individuals for their residence. This is why landlords typically secure buy-to-let mortgages when acquiring properties for tenant occupation.