Finance
How is a Buy to Let Mortgage Different to a Typical Home Loan?
By Craig Upton, CEO of iCONQUER
With real estate experts and economists predicting a potential boom for the private rentals sector, the appeal of Buy to Let investment opportunities is growing. First-
time investors and established landlords alike are setting their sights on desirable properties in key UK regions, as it becomes increasingly difficult for first-time buyers
to get on the property ladder.
But what exactly is involved in obtaining a Buy to Let mortgage as a first-time property investor? If considering buying and letting out a home for the first time, what
kinds of costs need to be factored in that differ from those of conventional home loans?
Elevated Initial Capital Requirement
One of the biggest obstacles standing in the way of many prospective investors is the initial capital requirement; in order to qualify for Buy to Let, most banks and
lenders impose a minimum deposit requirement of 25%. Some are willing to consider deposits of 20% but this still constitutes a major outgoing.
85% LTV Buy to Let mortgages were available from some specialist lenders prior to the pandemic, though have largely disappeared from the market. An independent
broker can help you make sense of the options available and ensure you get a good deal in accordance with the size of the down payment you are able to provide.
Eligibility will also be determined on the basis of the subsequent monthly rental income being sufficient to cover the costs of the loan. In order to compensate for
potential future increases in costs, the lender will expect a projected rental income of 125% to 150% the monthly mortgage payment.
Typically an Interest-Only Facility
What often surprises first-time investors with Buy to Let mortgages are that they are provided in the form of interest-only loans. This means that during the course of the
loan, you are only required to repay the interest on the facility.
When the loan term comes to an end, the original amount of the loan must be repaid in full. Consequently, applicants are expected to provide evidence of an exit strategy
(aka repayment plan) at the time of their application.
This means providing the lender with detailed information as to how you intend to repay the loan when the term comes to an end. Examples of which include personal
savings, investments, capital growth and other assets of value.
Buy to Let Mortgage Rates and Fees
The APR on a Buy to Let mortgage will be determined by multiple factors including the creditworthiness of the applicant, the size of the loan and the LTV of the mortgage; the larger the deposit and the stronger the credit history of the applicant, the lower the APR.
Fees and charges can also be slightly higher, though vary significantly from one lender to the next. Where upfront fees apply, they currently average around £2,000.
This is also where the services of an independent broker can prove invaluable, helping you minimise overall borrowing costs with the help of a reputable lender.
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