17 October 2014
Being a new landlord is an exciting and promising new adventure but it can also be a little overwhelming. Talking money and mortgages isn’t always a comfortable or interesting topic but it is essential to grasp these basics before you can get yourself up and running. Here in this landlord guide, we hope to outline the differences between a normal mortgage and a buy-to-let mortgage.
Buy-to-let mortgages are typically similar to ‘normal’ mortgages, otherwise referred to as residential mortgages. There are some particular differences between the two that it is essential to understand before you get started.
- Buy-to-let mortgages require a steeper deposit than residential mortgages. Landlords require a deposit of at least 25% of the value of the property that they intend to buy. The highest loan-to-value mortgage available is a whopping 75%.
- The interest rates that come alongside buy-to-let mortgages are generally higher than the interest rates that accompany residential mortgages. The reasoning behind this is that there is a greater risk associated with the borrower defaulting on their repayments and so the interest rate rises in line with the risk.
- Buy-to-let mortgages can be categorised in one of two ways. You can choose a repayment mortgage which ensures that at the end of each month, you must pay a little interest alongside a small payoff toward the loan.
- Interest only options only require you to pay off the interest on your loan rather than the actual loan itself. Such mortgages are appropriate for those who are intending to buy property to rent. Such options are ideal as by paying off the interest towards the loan, there is no risk of getting into debt. The rent acquired is taxable and therefore must be declared on a self-assessment tax return.
- Having chosen either interest rate, there is a little more choice involved. You know what they say; variety is the spice of life. You now need to choose between a tracker, fixed rate, discount, capped rate or variable rate.
- Tracker mortgages follow the base rate of the bank of England. This means that if that base rate increases or decreases, your mortgage will follow suit.
- Fixed rate mortgages are somewhat more dependable. As the name suggests, the rate is fixed, so your mortgage will not rise and fall mercurially over time.
- Discount mortgages provide landlords with a fixed period during which the rate is reduced. As time passes, the rate reverts back to the standard variable rate, which can be higher than originally thought.
- A capped rate ensures that landlords will always know the maximum they will ever have to pay. It doesn’t matter how the base note of the Bank of England fluctuates. Your mortgage never will.
- The variable rate basically adheres to the Bank of England’s baseline but interest is free to fluctuate up and down.
- Once you are familiar with the terminology and the choices available, contacting a broker is an essential next step. They can set you up with the most suitable buy-to-let scheme to suit your needs. Always research your choices online before you commit.