For many people who want to invest in property, a buy to let mortgage is a good option, allowing them to borrow the money they need for their property investment. I’ve been looking into the idea of buying to let in the future as a ‘pension plan’ for myself and my husband. There are a number of differences between buy to let mortgages and normal residential mortgages so I thought I’d share my research with you today and help you get to grips with these differences…
One main difference between a residential and a buy to let mortgage is the amount of deposit you will need. On the whole, you need a much bigger deposit in order to qualify for a buy to let mortgage. Loan to Value is a way that financial professionals figure out how viable a mortgage is by comparing the amount of deposit with the overall cost of the property. With a residential property, the loan to value (LTV) can be far higher than what would be acceptable for a buy to let mortgages.
LOAN TO VALUE
According to MoneySupermarket, the average LTV of a buy to let loan is 69%, but the average LTV for a first-time buyer applying for a mortgage is 82%. It is generally accepted that you need at least a 25% deposit in order to qualify for a buy to let mortgage. Furthermore, buy to let property purchases often have a lower purchase price than residential properties because you often need a bigger deposit. So, for example if you have a £5,000 deposit you could get a property worth £100,000 on a residential mortgage, with an LTV of 95%.
INVESTMENT PROPERTY PRICES
Often investment opportunities from buy to let property investment specialists like RW Invest are far more attractively priced than residential properties. Between 2016 and 2018, the average purchase price of a buy to let property was around £183,000, which is less than the average price of residential properties.
A buy to let mortgage is seen as a higher risk from the mortgage provider, therefore it is more expensive for the borrower than a residential mortgage. This is because there is a potential to not receive income during the investment, and if a tenant doesn’t pay rent or there are void periods, the mortgage payments still need to be met. Often buy to let mortgages are interest only, which means the amount you have borrowed is only paid back at the end of the term and you only pay the interest every month. Because of this interest rates on buy to let mortgages are often higher than equivalent residential mortgages. At the end of the investment, the sale of the property pays off the outstanding mortgage balance.
There are also several conditions that you need to meet to qualify for a buy to let mortgage. You usually can’t get a buy to let mortgage on a property that is less than 30 metres square, which discounts a lot of student accommodation investments and some studio apartments. Buy to let mortgage lenders also have to look at the project rental income the property will receive to make sure the investment is viable. In order to get the very best buy to let mortgage, it is important to shop around for the best deal. There a number of mortgage comparison sites which can give you an overall idea of what kind of buy to let mortgage is best for you.
I hope this information has been helpful if you too are considering purchasing a property to let out in the future. There’s a lot to consider before you take the plunge and it all depends on your current (and future) financial situation so be sure to get professional advice before you make any decisions.