Buy-to-let Mortgage
Guide
Although the owner-occupier
housing market is showing signs of quieting down, the popularity of property
as an investment grows. According to the latest report by the Association of
Residential Letting Agents (October 2004), almost 60% of buy-to-let investors
are planning to buy another property in the next year. But if you're buying to
let, it pays to do your sums beforehand.
Buying residential property
to let has become an increasingly popular investment choice. This is hardly
surprising, given the recent upward surge in the property market. Buying to
let allows you to borrow the lion's share of the property value. But you then
keep the growth in the value of the whole property - not just your deposit.
This process is known as 'gearing' and is the key to the attractiveness of
buying to let.
Most people buying to let
will need to take out a specialist mortgage. You will also need to put down a
reasonable deposit - most lenders in this market will require at least 15% as
a down payment, although many lenders are now asking for up to 30%.
The good news is there is
now more choice in the buy-to-let mortgage market. Previously, landlords were
forced to take out commercial mortgages that were more expensive, but nowadays
almost every high street lender offers a buy-to-let mortgage of sorts.
If you have substantial
equity in your own home, you may be able to look at re-mortgaging this and so
obtain the funds to take out a small buy-to-let mortgage.
Because of the higher risks
involved with letting out a property, buy-to-let mortgages are more expensive,
although deals do vary. While you can expect to pay more than for your own
residence, there are some very competitive fixed and discounted buy-to-let
offers around.
Lenders take different
approaches. Some will base the mortgage on your income in addition to the
amount of rent they estimate can be obtained.
Some lenders will base the
loan purely on the expected rental. The formula they use will also vary.
Typically a lender will require the rent to be at least 130% of the mortgage
payment. Others will offer a three times' salary multiple and half the rental
income.
Others base the amount that
they will lend on your salary and the existing loan commitments that you have,
but then apply the 'deduction rule'. This means that they will lend up to 3.5
times your income (or whatever salary multiple applies), minus a
representative figure for annual mortgage payments worked out at a pre-set
level of interest. Say you earn £40,000 and have an outstanding mortgage
balance on your property of £120,000. Under the rule, the annual mortgage
repayments may be calculated as £10,000. This would be deducted from your
salary to leave £30,000, which is then multiplied by 3.5 to give £105,000 -
the amount that you are able to borrow.
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