Buy to Let - the best type of mortgage for you

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If you want to buy a property to rent out then you may need a commercial Buy To Let mortgage, but you are not limited to a strict Buy To Let mortgage definition and if you are a landlord with multiple properties then you may be better suited with a specialist lending arrangement rather than individual mortgages. Some lenders, like HSBC, have recently moved towards treating Buy To Let mortgages as non-commercial normal mortgages, but as long as a mortgage is for your Buy To Let property then interest payments are tax-deductable (unlike a mortgage on a property you live in). However from April 2017 UK landlord tax relief on mortgage payments will be limited in yearly steps to 20pc by April 2020, falling for higher income tax band landlords from the current 40pc and 45pc rates, so in this case it might pay to consider incorporating your BTL property into a business. And if you have bank savings that earn little, then it may be better if you can make extra tax-deductable BTL mortgage payments from such savings.

Buy To Let mortgages are generally commercial mortgages with some special aspects, as discussed elsewhere on this website, but you can find different kinds as with private mortgages. The most common Buy To Let mortgage is a variable interest-only mortgage or a variable repayment mortgage both approximately following any base interest rate changes like a Tracker mortgage but without an exactly specified tracking rule (instead lenders generally following market interest rate changes). If you are considering a Buy To Let and have Excel on your computer at home or at work, then we can supply a very helpful Excel Buy To Let profit calculator that includes a separate mortgage calculator - click Buy To Let calculators.

General considerations about getting a mortgage

If you need a mortgage, then first cleaning up your credit should help. Identify, pay off and close any credit or cards that you do not need to keep - before you shop for your mortgage. 1 or 2 high-limit cards with low balances are best kept.

Mortgage 'Pre-Qualification', Many lenders allow you to 'pre-qualify' for a mortgage, You give a lender information about your assets, income and liabilities and the lender roughly estimates how much money you can borrow. This process is informal and the lender does not verify the information provided, nor charge you a fee. The lender also does not formally agree to approve a mortgage for the amount you are pre-qualified to borrow. So the pre-qualification process does not guarantee loan approval, but it does give you a general idea about how much money lenders may be willing to provide you. This helps you decide if you are want to borrow that much money, and to see which types of properties fall within your price range.

Mortgage 'Pre-Approval'. Many lenders allow mortgage 'pre-approval'. With pre-approval, the lender checks your credit, verifies your financial and employment information and confirms your ability to qualify for a mortgage to a specified amount. Sellers are often more willing to accept offers from pre-approved buyers, than from prospective buyers who need a mortgage but may not be able to actually get one.

Choosing a Lender. Mortgage brokers, estate agents and banks or other lenders are all popular sources for mortgages and can have lending conditions that vary greatly.
Mortgage brokers are used by many buyers and generally have access to a large number of mortgage providers and will shop the market on behalf of their clients. Mortgage brokers can be especially useful if you have weak credit or want an unusual type of loan. Of course, mortgage brokers charge fees that can sometimes be excessive, so choose one carefully. Time spent comparison shopping could save you lots in commission and document-processing fees.
Estate agents often introduce their clients to lenders. As estate agents make their living selling property, they can have some good contacts with some lenders and be a major convenience for their clients. Many home-buyers are pleased to work with a lender that their estate agent recommends though this may offer a limited choice of mortgages and maybe higher costs.
Getting mortgages directly from banks or other lenders is also popular. If your local bank, building society or supermarket offers a good interest rate and attractive terms, there's no reason not to take the loan. If they don't, there are plenty of others in town. The main drawback to dealing directly with lenders is that each one generally offers only a limited number of mortgage deals and usually also have fixed fees that you may not want.

Using the internet. You may be able to arrange a mortgage on the internet, since many mortgage brokers, estate agents and banks or other lenders now have websites. Certainly the internet is now a popular method of gathering information and comparing loans. Even if you ultimately get your mortgage from a bricks-and-mortar establishment, data gathered online can provide a wealth of information for comparing lenders and loans and maybe for negotiating terms.

To avoid. BUT do avoid getting too many mortgage quotes, online or not. Too many credit checks over an extended period of time can have a negative impact on your credit rating. It is safer to get well informed first, then get a limited number of quotes over one week only.

First consider what kind of mortgage might best suit you for buying a property for you to to live in ;

Generally if you need or want a mortgage, then you can easily get a mortgage that is not the best one for you. Mortgages are often missold by sellers claiming to be experts. One day they all push Endowment mortgages, then Repayment mortgages or Low Start mortgages or Overpayment mortgages or Fixed Rate mortgages or Offset mortgages - and each type will also have different interest rates available. For any one kind of mortgage, lower interest rates are best of course. But different kinds of mortgage may best suit different people, though they may not have the same interest rates. For some a mortgage is the only way they can afford to buy a property, but for some a mortgage is profitable cheap money costing maybe 5% net to free-up other money for investing at a higher return maybe 10% net.

Savings and income small. A normal Repayment mortgage should be best if you can get one for the property that you want and you can afford the payments. (Some sellers may help on a deposit or furnishing, or offer Shared Ownership or Homeown schemes.) Otherwise, if your income is likely to be rising then a Low Start mortgage might allow you to buy a better property or to have lower payments. As an alternative to a low start mortgage, a young new graduate might reasonably consider a permanently low payment interest-only mortgage or endowment mortgage linked to eg a pension, though at the end of it gambling whether some net lump sum may be collected or be owed.

Savings small and income large. A normal Repayment mortgage should be best if you can get one for the property that you want. (Some sellers may help on a deposit or furnishing.) An Overpayment mortgage will be better if you prefer to pay off your mortgage early, but an Offset mortgage linked to your current account could help with that more cheaply.

Savings large and income small. A smaller Repayment mortgage may be best, preferably Offset, but if you can invest your money at a better net return than the mortgage interest rate that you can get then you should get the biggest Repayment mortgage that your income can reasonably afford.

Savings and income large. If you can buy the property you want without a mortgage, then only get a mortgage if you can invest your money at a better net return than the mortgage interest rate that you can get - and in that case try to get the biggest Repayment Offset mortgage you can afford.

Initial mortgage payments must be affordable for you, leaving enough of you income for normal bills and expenses. (If your income is small then a mortgage taking 30% of your income may be difficult for you, but if your income is larger then 50% of your income may not be difficult for you.)

Mortgage payments in later years. The actual money cost of a normal 'variable' mortgage is fixed for the life of a mortgage IF interest rates do not change, so that the real cost tends to fall in later years. BUT if interest rates rise then the money cost of your mortgage could rise a lot for a year or two and make it difficult to keep up payments. Many partly 'insure' against this by taking a slightly dearer mortgage with the first few years held at a fixed interest rate. And if sickness or unemployment might make paying a mortgage difficult, you can get mortgage insurance to cover that. If you have a bad credit history then you will be offered only somewhat higher interest rate mortgages.

Good mortgage calculators can help you choose the best mortgage for you, but many of the online mortgage calculators available are little help. They are generally on mortgage seller or broker company websites, and limited to the types of mortgage they push. Our good ones are explained on - Mortgage Calculators.

But if you are thinking of Buy To Let property investment, then that may need commercial Buy To Let mortgages.

The chief difference is that generally these mortgages will normally be at most 85% of property value, and often they will be calculated on expected rent and require that to be at least 125% of the mortgage interest payment. If current home loan mortgage rates average 5% then Buy To Let mortgage rates should be around 5.25%.

PS. Though maybe not of direct use for Buy To Let, there is also something called a 'reverse mortgage' or 'lifetime mortgage' which is basically an equity loan to generally older property owners, to release the equity in their property either as a lump sum or as periodic income payments. The homeowner's obligation to repay the loan is usually deferred until the owner dies or the home is sold. If a reverse mortgaged property increases in value, it may in some countries be possible to later get a second reverse mortgage on its increased equity. An alternative especially for older homeowners is 'Sell And Rent Back' where the owner sells their house but continues living in it by renting it from the new owner.

NOTE :- 2018 interest rates in the UK have almost certainly bottomed and property prices have started rising. A time to buy and to go for Fixed Rate mortgages or Interest-only mortgages if you can get them rather than Variable or Tracker mortgages. (Those who have recently taken our advice favouring interest-only are now paying almost nothing for their mortgage !) We do special Buy To Let profit and mortgage calculators at Buy To Let Profit Calculators.

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