What is a Buy to Let mortgage?
Differing to residential mortgages, buy to let mortgages allow landlords to borrow a sum of money to buy a property for the sole purpose of renting it out.
Buy to let mortgages work similarly to residential mortgages, but a mortgage lender will take your income, plus the potential rental income of the property, into account when determining how much money they are prepared to lend.
Many people buy properties to rent out in order to make a profit or to invest in the future.
How do Buy to Let mortgages work?
Buy to let mortgages are typically interest-only, so any monthly repayments will only pay off the interest accrued, not the balance. When the property is sold, the cash from the sale will pay off the outstanding amount.
Any income you receive from the rental can be spent as you wish, although many borrowers place the money into a savings account to contribute to paying back the mortgage at the end of the agreed term.
There are three main types of buy to let mortgage:
- Fixed mortgages
- Variable mortgages
- Tracker mortgages
The arrangement fee for a buy to let mortgage is usually higher than a residential mortgage around and you will generally require a larger deposit than you would for a standard residential mortgage, due to the higher level of risk.
Mortgage lenders regard buy to let mortgages as higher risk than residential mortgages as:
- Tenants may stop paying rent, leaving you unable to meet your monthly repayments
- You may struggle to find a tenant to rent the property
Unlike a residential mortgage, a buy to let mortgage depends on a third party – a tenant – to provide the borrower with the means to pay it.