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All You Need To Know About Buy-To-Let Mortgages

All You Need To Know About Buy-To-Let Mortgages

Buy-To-Let mortgages became increasingly popular five months into the Covid-19 pandemic, as there were more people looking to take advantage of the current situation and buy investment properties. The added bonus of the stamp duty holiday relief made it even more enticing, and the market saw a huge demand in houses for sale.

Whether you are an investor in the buy-to-let market or one of the great many “accidental” landlords who rent out their main property whilst living elsewhere, you’ll need to get a specialist buy-to-let mortgage. While it is similar to the standard residential mortgages, there are some important differences you need to be aware of.

  • Most buy-to-let mortgages are interest only. This means you won’t be repaying any of the capital during the lifetime of the mortgage, so it’s vital you know how you are going to pay off the loan or refinance at the end of the term.
  • You will need a larger deposit than with residential mortgage. Typically, you will need a minimum deposit of 25% of the property’s value. The best interest rates will be available to those with larger deposits of 40% or more.
  • Upfront fees are higher than with standard mortgages, usually between 1.5% and 2% of the value of the loan. Be sure to factor this in when comparing deals.
  • The mortgage affordability test is based on the profit a landlord is likely to make from the property. Lenders use projected rental income and a representative interest rate to calculate ICRs (Interest Cover Ratios). Generally, the monthly income must cover at least 125% of the loan repayment.
  • As with residential mortgages, you can choose between a variety of different products including fixed rate, tracker, and discounted variable rate. Interest rates are historically low at the moment and there are very cheap deals around, particularly if you have a large deposit.
  • Bear in mind that there is a 3% stamp duty surcharge applied on buy-to-let purchases. This is still applicable during the stamp duty holiday period.