Differences Between Buy To Let & Residential Mortgages
Today more than ever, purchasing properties with the intention to rent out is growing in popularity. Having a property, or a portfolio of properties that you rent out can seem like an easy way to make money.
However, when purchasing a property with the intention to purely rent it out, you may need to have a buy-to-let mortgage.
Buy-to-let mortgages have some similarities with standard residential mortgages, but also have some standout differences too.
Who can get a buy-to-let mortgage?
Buy-to-let is accessible to a wide range of people. You can get a buy-to-let mortgage if;
- you want to invest in property such as houses or flats
- you already own a home, either outright or with a mortgage
- your borrowings, debts and general credit record is good
- you earn over £25K a year
- The upper age limit for when a buy-to-let mortgage can end is 75. So you must be able to pay it off before this point
What is different about a buy-to-let mortgage?
A residential mortgage is for those who intend to live in the property themselves. Otherwise, you would need to apply for a buy-to-let mortgage.
Generally speaking, buy-to-let mortgages are seen as riskier than residential mortgages, because there is no certainty the property will always be occupied, or that tenants will pay on time.
This leads to a lower return from the property and may affect how the mortgage is paid back. This doesn’t mean that buying to let is not potentially a great investment.
However, because of this, buy-to-let mortgages tend to require larger deposits.
Typical residential mortgages require repayments of both the loan and interest each month. However, with buy-to-let mortgages, most landlords choose an interest-only mortgage whereby landlords only pay the interest repayments, which is a considerably lower payment compared to those with residential mortgages.
At the end of the mortgage, the owner is required to repay the mortgage in full. So if you borrowed £75K for your buy-to-let mortgage, at the end of the mortgage you owe your bank £75K.
Most will repay this by selling the property, however, house prices may have lowered, so it’s always wise to have the amount in savings as property prices can fluctuate.
How much can I borrow?
“The main difference between a buy-to-let mortgage and a residential owner-occupier mortgage is that the mortgage provider will consider the potential rental income when assessing affordability,” according to Greg Went, a senior product manager at Nationwide.
The income for the rental should usually be around 25-30% higher than the mortgage payment.
Most high street lenders offer buy-to-let mortgages, and with all the benefits of renting such as additional income, long-term security and being a flexible investment, it’s always worth considering buying to let as your next investment move.