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If you can’t buy your investment property outright, you'll need to apply for a mortgage. But this will have to be a specific buy-to-let (BTL) mortgage, as a standard or 'residential' loan only applies if you also plan to live in the property.
There are various differences between a residential and buy-to-let mortgage, starting with the way your affordability is calculated. Instead of looking at your salary, the lender will view the potential rental income of the property as your primary income source. Most lenders will then also take the your personal income into account.
Typically, lenders will want your anticipated rental income (as verified by independent sources) to meet at least 125% of the monthly interest payments on the loan. This could be based on a fixed rate, the standard variable rate (typically with a 1% loading) or an assumed interest rate which could be higher than both of these. Calculations and rates will vary between lenders.
The 25% leeway and interest rate headroom are to ensure you are covered during so-called void periods when the property is without tenants. It reassures the lender you will still be able to meet the payments even when you have a void. Some lenders since the MMR (Mortgage Market Review) now also apply a stress test on top of this, for example if they simulated interest rates getting back to 5% would the 125% ratio still be maintained. So in essence, they are checking you could afford to pay the mortgage with void periods and if at the same time interest rates were back to 5%.
A deposit on a buy-to-let mortgage tends to be bigger than the one required for a standard loan. Most buy-to-let lenders expect a deposit of at least 25% and the very cheapest deals usually require 40% or more.
What are loan fees and how much are they?
BTL mortgages with the lowest interest rates tend to come with the biggest up front fees, typically arrangement and valuation fees, so its always best to work out whether it might sometimes be better taking a higher rate with less fees, in some cases this might be cheaper. A market leading mortgage rate could carry a fee as high as 2.5% of teh loan which equates to £5,000 on a £200,000 mortgage. You can lump the fees together with the loan, but this means paying interest on them too.
There is so much to consider and so much choice that taking professional advice from independent financial advisors is always prudent.
We can help
Whether you are a first time landlord venturing into the world of buy-to-let or you are an experienced landlord and property investor, Embrace Financial Services can help you with every step of the way.
Embrace Financial Services have professionally qualified mortgage advisers that can support you through the maze of mortgage options. They will search their comprehensive panel on your behalf to find the best options to suit your needs. They even have access to mortgage deals that are not available on the high street.
An extensive choice of mortgage products specifically designed for Buy-to-Let investments
Interest only or capital repayment options
Insurance cover available specifically for buy-to-let properties