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Buy to let investment

Buy to let mortgages

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When buy to let was first introduced as a specialist scheme in 1996, there was only a small number of lenders providing a very limited choice of loans. This is no longer the case. There are now upwards of 50 lenders who may be willing to arrange a buy to let mortgage.

Today's mortgage market contains a large number of special products that are aimed specifically at the buy-to-let market. These mortgages do not differ vastly from other mortgages - you can usually find discounted, fixed, capped and base rate tracker buy-to-let mortgage rates. You can now even find some buy to let mortgages with flexible features. However, there are three key differences in comparison to standard mortgages:

You will have to pay a larger deposit. Normally, you have to stump up no less than twenty percent of the property value as a deposit for a buy-to-let mortgage, though you can now get away with as little as 15% with some lenders. With schemes where the demands for a deposit are not so tough, that will usually mean you are paying a higher rate of interest. Conversely, to take advantage of the most competitive mortgage rates, you may have to raise twenty-five, thirty, or even forty percent of the property value.

Rate of interest
As a rule, buy-to-let mortgage rates are not quite as competitive as other mortgages, costing you perhaps a few tenths of a percent extra in interest each year. Since you are not paying back the mortgage directly to the lender and will probably be relying on your tenants to pay their rent, the lenders see buy-to-let mortgages as more risky than other types. This means that you have to pay a higher rate to compensate them for the higher level of risk.

Lending criteria
Lenders will normally incorporate a proportion of the rental income when calculating how much money they are willing to lend you. Unlike other mortgage schemes, where the lender may stick fairly rigidly to the income multiples that they use, this allows you to purchase property beyond your normal price range - provided that you can raise the deposit.

Often, expected rental income must exceed the mortgage repayments by a certain percentage, sometimes as high as 150% of the repayments. Some lenders will only consider the size of your deposit and the rental income when assessing how much you can borrow. Others will also take into account your own status and income and allow you to borrow more.

You an also often buy more than one property with buy to let mortgage schemes, again provided that you have sufficient funds for a deposit. There may be a maximum limit to the number of properties that the lender will allow you to have, therefore limiting your overall exposure to the market. There will also normally be a total maximum loan.

Always be slightly wary of over-stretching yourself - remember that you cannot guarantee you will always have tenants in the property, and if it is vacant, you will have to foot the mortgage bill on your own.

Another common requirement is that the property is let and managed by an ARLA letting agent on an assured shorthold tenancy agreement.

Different lenders will have different lending criteria. Please refer to our section on mortgages for more information. It can be worthwhile getting professional financial advice in order to discuss the whole matter of your property investment, mortgage selection and application and the other costs and financial products that you may choose or be required to obtain.

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