Those looking for ways to break into property investment have likely come across the term ‘buy-to-let’.
A buy-to-let mortgage offers a great opportunity for prospective landlords and a route for them to get a foot on the property ladder.
A mortgage is not an agreement that many take lightly, and naturally there will be a lot of questions before undertaking one.
Here we explain what a buy-to-let mortgage is and what you can get out of one when looking for buy-to-let properties in Liverpool.
What is a buy-to-let mortgage?
Like a standard homebuyer’s mortgage, a buy-to-let mortgage involves a lender helping you to purchase a property, subject to rather stringent checks and requirements, with a sum that you pay back.
However, there is some choice in how you repay your borrowing that you don’t normally get in a standard mortgage, and the means of securing a buy-to-let are slightly different.
The amount your lender will offer you depends on the projected rental income from the property in question, and you’ll need a higher deposit than for a standard mortgage.
Many buy-to-let mortgages need at least a 25 per cent deposit to get started, and some demand as high as 40 per cent.
Buy-to-let mortgages can be fixed rate or variable, like standard mortgages.
Fixed-rate mortgages keep interest out of the equation for the agreed term and your repayments will stay the same. Variable-rate mortgages can take advantage of low interest rates but similarly fall victim to higher ones, so repayment amounts can fluctuate over time.
What does interest-only mortgage mean?
Many buy-to-let mortgages are interest-only, meaning you don’t pay back the actual amount borrowed like in a normal mortgage. Instead, you pay back the interest accrued on the mortgage each month until the end of your term.
At the end of the mortgage term, you’ll owe the full amount originally borrowed. You’ll also still need to pay interest on this full amount until it’s repaid.
Interest-only mortgages can be an attractive idea as they’re more affordable than repaying your borrowed amount, and many investors plan to sell the property off at the end of the mortgage to pay off the borrowed sum.
However, there is an element of risk in that the value of your property could drop during the term of the mortgage. Selling the property at a loss after borrowing on a higher amount means an overall loss as you will still need to pay back the original amount lent to you.
What is a repayment buy-to-let mortgage?
A repayment structure is closer to what you’ll likely recognise on a mortgage, wherein you pay back the borrowed amount plus interest in instalments. This means higher repayments each month, especially considering the higher interest rates on buy-to-let mortgages in general, but it also means that you’ve repaid your borrowing at the end of your term.
This may be a better choice for investors who have more capital available and want to own their property long-term, though repayment buy-to-let mortgages are less common than the interest-only kind.
Where can I get a buy-to-let mortgage?
Many of the same lenders that offer standard mortgages for homebuyers will also offer buy-to-let mortgages. These will come with the lender’s own specific set of requirements and terms, as with any other mortgage.
Some lenders will want more detail about your financial circumstances than is normal for a standard mortgage. Due to the aforementioned risk of a property dropping in value during the interest-only payment term, lenders may want to know what your plan is if the sale value of the property becomes insufficient to cover the original sum borrowed.
When would you want a buy-to-let mortgage?
There are a number of reasons why someone might take out a buy-to-let mortgage for a property, including:
- Wanting to move into property investment with a structured, organised way of borrowing
- You don’t have a massive amount of upfront capital but you have reliable income streams to afford monthly repayments
- You want a property that you aren’t specifically relying on a resell to afford
- You want an investment that effectively pays for itself (at least in part)
Additionally, some of the costs of running your rental property can be offset against tax when the time comes to fill out your self-assessment tax returns.
When do you become a landlord?
As soon as you own a property to let, whether it’s an outright purchase or through a buy-to-let mortgage, you’re a landlord.
Unfortunately, you’re still the landlord of a property even if there’s nobody in it. As such, you need to repay your mortgage even if there’s no rental income to speak of. This means having a reliable fallback for harder times, whether that’s paying out of your own savings or using the income from another property to cover it until you can find new tenants.
Becoming a landlord means a host of other financial responsibilities such as paying a three per cent Stamp Duty surcharge, maintaining the property with services and safety checks, and paying for repairs when things go wrong. This might mean emergency callout fees if essential facilities should break at the worst time, so simply covering mortgage repayments won’t be enough to effectively manage your investment.
Circumstances can change quickly between tenants, the housing market, and the overall health of the financial sector, but sound planning with the right knowledge and advice can help navigate many of these issues before they should ever occur.
Property investment with Mistoria Estate Agents Liverpool
We know where landlords go wrong and we can help you avoid costly mistakes. Whether you’re looking for buy-to-let properties in Liverpool or simply to get some advice on buy-to-let mortgages, our team can give you all the answers you need to take your first steps towards becoming a landlord.
To ask us for advice or get more information on our services, don’t hesitate to contact us today.