Hoppy have partnered with Mojo Mortgages to help you find your perfect buy-to-let mortgage match.
Get Your Buy-to-Let Mortgage Sorted in 4 Hassle Free Steps
If you’re thinking of buying a property to rent out, then you’ll need a specific type of mortgage: buy-to-let. This type of mortgage is different from the conventional kind you would need to buy a home you plan to live in. That’s why it’s important to know how they work before committing to one. Hoppy’s easy to understand guide about buy-to-let mortgages is here to help.
Buy-to-let mortgage basics
Residential mortgages and buy-to-let differ quite a bit. Buy-to-let mortgages typically incur higher fees, higher rates of interest, and a bigger deposit requirement compared to residential mortgages.
Residential mortgages are offered as capital and interest loans; this means that monthly payments cover the interest and a portion of the debt, so the value of the loan and the interest is paid off gradually over the deal period.
Buy-to-let mortgages are usually interest-only, meaning the capital; debt (the amount you borrowed as a mortgage) will only clear at the end of the term deal period. It’s a higher risk mortgage for lenders because it relies, at least in part, on the monthly payment being covered by the rent a landlord collects from tenants, which can be unreliable, or the property can be vacant. Considering this, the lender needs to guarantee payment, and that’s how the higher costs are passed onto the borrower.
Now, let’s break down details like loan size and buy-to-let mortgage rates in more detail.
Loan size: buy-to-let mortgages
All mortgages work with a starting calculation of a loan-to-value (LTV) figure; it refers to the size of the mortgage as a percentage of the property’s value.
With a residential mortgage, the LTV is typically 90% or 95%. The difference between the LTV, the asking price of the property, and the total loan is made up of your deposit. If the LTV is 95%, your deposit size needs to be 5% and so on.
Since buy-to-let mortgages are seen as higher risk, lenders want higher deposits (cash in the bank) to protect themselves financially, with a typical deposit requirement sitting around the 25% mark. The bigger the investment you can make in the form of a deposit the smaller your monthly repayments will be.
So, even though the average loan-to-value ratio is lower for a buy-to-let property compared to a residential mortgage, you will need to do some careful calculations first, factoring in the higher capital cost required to pay off the value of the property at the end of the mortgage period.
Buy-to-let mortgage rates
The total amount you borrow for a buy-to-let mortgage will determine the interest rate to pay. Other factors influence rates too, for example, expected rental income, your general financial situation, and the type of mortgage you go for.
There are a few different mortgages on offer:
Tracker mortgages: this type of mortgage calculates its rate by setting it at a certain percentage above the Bank of England’s base rate, which can change – your mortgage rate then ‘tracks’ this number. It does mean that your monthly repayments can vary, increasing or decreasing, depending on the base rate.
Discounted variable mortgages: lenders typically have a variable interest rate, or SVR, which is set at a particular number – let’s say 6%. A discounted variable rate mortgage will have a rate that is a fixed amount below the SVR. If the discounted rate is set at 2% below the SVR, then the mortgage rate will be 4%. Should the SVR move up or down, the variable rate will follow with the discounted rate remaining in place; if the SVR rises to 7%, for example, then the rate to pay would increase to 5%. A usual discounted rate deal is valid for two years, after which your mortgage will be moved onto the lender’s SVR.
Fixed-rate mortgages: fixed-rate mortgages are great for those looking to lock in their repayment amounts for two, three, or five years. The repayment amount will depend on the deals offered by mortgage providers at the time when you’re looking to take out a loan. Once the fixed-rate period ends, you’ll be moved onto the lender’s standard variable rate, with the rate potentially differing, and this is when you can look for a new deal.
Interest-only mortgage deals: when this type of deal draws to a close, you will still have to pay off the cost of the property purchase price since you have only been paying back the interest. One way to do this is by selling the property. If you decide to do this, then property prices need to have risen, or stayed stable, to cover what you owe towards the property value. Should property prices fall at the time of selling, you will need to make up the loss on the price you paid for the property.
Landlord fees to know about
Buying a property for renting purposes comes with fees that need to be budgeted for before you can really decide if you can afford a mortgage and its repayment.
The main one to consider is that you’ll be liable to pay on any rental income, alongside further fees: landlord insurance, letting agent’s fees, rent insurance, and more. It’s essential to research all the landlord regulations and responsibilities before progressing with a mortgage application, so you have the full picture of all the legal and financial obligations you’ll be taking on.
How to find the right buy-to-let mortgage deal
Once you’ve done your research and budget calculations, it’s time to start looking for the right buy-to-let mortgage deal. There are a lot of options on the market that will be suitable for different borrowers.
Use Hoppy’s , in collaboration with Mojo, to see the options available for you. We’ve partnered with Mojo to help you get more out of your mortgage experience. They work with over 90 lenders, and we see them as real experts that can help you through the mortgage process.
Together, we’ll find you the best quotes based on the information you provide and break down all the details so you can understand it easily. It really couldn’t be easier.
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