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Buying a property may be considered a worthwhile life investment. However, sometimes you may not have the required funds to acquire the property, and you may opt for a mortgage. The good thing with property investment is that you can let your money work for you by renting out the property.
A buy-to-let mortgage is a loan that allows you to purchase property to rent it out. Although a rental property can be a significant investment, it can also come with considerable risks that require your utmost skepticism. However, you cannot live in the purchased property for you to qualify for a buy-to-let mortgage.
If you wish to live in the property, then you should opt for the standard residential mortgage. Residential and buy-to-let mortgages are pretty similar but also have significant differences.
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Working Mechanisms of a Buy-to-let Mortgage
As mentioned earlier, a buy-to-let (BTL) mortgage is pretty similar to a residential mortgage. However, the main difference is that a buy-to-let mortgage has an interest-only repayment basis. It means that you only make repayments towards the mortgage interest.
However, it doesn’t mean that interest-only repayments are deducted from your initial capital. After repaying the loan interest, you will still need a plan to clear your original loan amount. Thus, you can sell the property or use your income and savings to clear the mortgage amount.
The application process for buy to let mortgages is similar to that of residential mortgages. All you need is to prove that you meet the requirements provided by the lender. The lender reviews your eligibility to determine the approval of your loan offer.
These mortgages have significant risks, and the lender may be skeptical, especially if you’re a first-time landlord. You can still get approval for the mortgage as a first-time landlord as long as you meet the lending criteria and don’t have any outstanding residential mortgages.
How to Be Eligible for a Buy-to-let Mortgage
You qualify for a BTL mortgage as long as you meet the criteria stated by the lender. Therefore, it is imperative to learn about the mortgage requirements before applying for the loan offer. This way, you can know whether you’re eligible before submitting your application.
First, make sure that you are well within the lender’s age restriction. The age restrictions may differ with lenders, and some may be strict with their age limits. Some lenders may have higher age limits required to make the loan repayment.
You will also be required to provide proof of income. This way, the lender can determine whether you have the financial capability to stick to your loan repayment obligation. You must also own a residential property purchased through cash or mortgage.
You’re also required to declare the type of property you intend to purchase. Additionally, mention the property use and show how much rental income you intend to earn. Ensure you don’t have existing debts or outstanding mortgage balances that would jeopardize your credit score.
Lenders will consider numerous factors to determine the loan amount you can receive. They will start by looking at the rent amount you expect to obtain from the purchased property. The lenders may offer a high loan amount if you expect a high rental income.
Your credit rating will also determine how much you can get as it shows your ability to repay the loan. Repay your outstanding debts to improve your credit score and qualify for a higher amount. Your income and how you settle your household bills also determine the loan amount based on the lender’s criteria.
It is imperative to note that BTL interest rates are high compared to residential mortgage interests due to increased risks. The arrangement fees, which may be a certain percentage of the mortgage amount, are also costs to consider.
The lender may also require you to deposit a particular percentage of the property value. Consider the income tax since the rent paid by tenants is considered income, and you’ll have to meet the tax obligations. Lenders will also consider if the property has an insurance cover, so it is vital to consider the insurance fees.
End of Mortgage Options
BTL mortgages have an interest-only repayment basis. However, you’re still required to clear the original loan amount after finishing up on your interest. You can choose to pay the mortgage out of your pocket or decide to sell the property.
Some landlords sell the property to make a profit and clear the outstanding loan amount. Check the market property values before selling to avoid making a loss and using extra cash to pay the loan.
Finding the best deal on a BTL mortgage can be pretty challenging. Do your research on the available lenders and their terms to know what you’re signing up for and if the loan conditions are favorable. You can use mortgage calculators to calculate the interest and a comparison tool to find the best loan offer.