What Is A Buy To Let Mortgage

Well don’t worry, because there’s more than one type of mortgage.

In fact, there’s a special type of mortgage made for home buyers who will be renting the residence out.

They’re called a buy to let mortgage.

What are they and how do they compare to a conventional mortgage?

If the name wasn’t obvious enough, buy to let mortgages are made for homes that will be purchased to rent. There is little difference between them and your usual, buy-to-move-in mortgage, with a few exceptions.

The key difference between them is when it comes to mortgage rates.

Unlike conventional mortgages, buy to let mortgages will carry higher rates, usually around 1 to 1.5% more than a conventional mortgage.

Why is this? Buy to let mortgages carry slightly higher mortgage rates because, in the lender’s eyes, they are slightly more risky. (And the more risky a loan is perceived to be, the higher the interest rate on it will be – that’s a universal financial fact.)

But why exactly does the lender see buy to let as a minor risk?

To understand this, think about what a buy to let mortgage is for – it’s for homeowners who do not have enough up-front money for the residence, and plan to take in income from renting.

That income will go towards paying down the mortgage.

Clear enough. But remember, you’re not going to have a renter and lease signed before you buy a home with a rent to let mortgage. (There may be some rare exceptions here, but they are very rare indeed.)

So, looking at this from the lender’s point of view, what if you purchase a home on a buy to let mortgage, but run into the problem of not being able to find a suitable, paying tenant?

Then you’re out of income that is needed to pay off that mortgage.

So, to help guard against this risk, the lender will ask for a higher mortgage rate than if you were buying a house and moving in as soon as the keys are dropped into your waiting hands.

This is understandable – it’s not easy being a landlord (a job those applying for a buy to let mortgage are going in to) and the rental market can go through unforeseen shifts in rental demand. Trying to rent a house out in the winter will be less successful than renting it out in autumn, for example, due to many city rental units going towards university students – students who are looking for a place to live in spring and autumn, not in the dead of winter.

Another key difference is that buy to let mortgages require you to pay more cash up-front – at least 20% for a normal to-be-rented house with a few units in it. This applies only in cases where you won’t be living in the home – that is, it will be a pure rental property. If you do live in it, the down payment won’t be as high.

Looking to purchase a home, but plan to rent it? Not sure of how a mortgage loan will accommodate you?

 

Leave a Reply