Buy to Let
Buy-to-let mortgages have become much more competitive in recent years. Now you almost have the same choice available as you have with ordinary mortgages.
Choosing a mortgage
The points to consider are pretty similar to those you make when choosing your mortgage to buy your own home. When you choose a property you will need to ask yourself how much you can afford to pay and how you will pay for it. If you take out a mortgage you should work out what percentage of the value of the property you need to borrow. Typically lenders allow people to borrow up to 80% of the property’s value. The size of the loan is usually linked to the expected rental income. As a guide your lender will expect your monthly rental income to be 25-50% greater than your monthly mortgage payments.
The choice of mortgages will be between a repayment mortgage or an interest only loan. With an interest only loan some lenders may require you to have a suitable investment product. For repayment mortgages some lenders require you to have suitable life insurance.
You need to decide whether you want to end the mortgage term with a fully paid-for property or not. If you have made no arrangements to pay off the mortgage capital (either through a repayment mortgage or a separate investment vehicle) then you may have to sell the property so you can pay it off.
It also depends on what you want from the rental income throughout the mortgage term. If you need some of the rent to live on immediately then an interest-only mortgage would probably be more appropriate because, after making the interest payments, there may be some rent left over .. If you don't need the rent for yourself, then all of it can be used towards the interest payments with the surplus being used for the repayment of the capital or, indeed, to help finance a further buy to let investment.
Remember you also need to keep some cash spare to cover void periods and repairs to the property. And, don't forget tenants who fail to pay their rent too - not only does it mean you're subsidising their housing when they don't pay up but it's an expensive business to have them evicted from your property.
So the advantage of a repayment mortgage is that the property will be all yours when you come to end of the mortgage term.
The advantage of an interest-only mortgage is that your monthly mortgage payments will be lower so more of the rental income should be available to you - and you don't need to worry about the capital repayment until the end of the term. The risk is that, if you haven't made other arrangements, you may have to sell the property eventually to pay off the original loan.
Bear in mind that you can get flexible buy-to-let mortgages which enable you to enjoy an element of both the repayment and interest only mortgages. Access to cash is immediate in an emergency and, if you don't need to get at it, any surplus can be used to repay the capital in the meantime. These are, however, slightly more expensive and you need to be very disciplined about how you manage your account.