Guides: mortgages

Buy to let mortgages

As the name implies Buy to Let mortgages are used to enable the purchase of a property that is intended to be let out to a tenant. Despite the recent upheaval in the housing market renting a house or flat for income remains a popular source of investment for many people. However, being a landlord is a serious and time consuming business, so you should take advice before entering this market.

When selecting a buy to let mortgage it is important to note that it is likely that you will be charged a higher rate of interest, and also pay a significantly higher arrangement fee, although the latter can usually be added to the mortgage.

The rental income should normally cover the mortgage payments by 125% – although this stipulation may vary from lender to lender – thereby leaving you with some spare cash to cover repair and maintenance, insurance and voids (when the property is empty).

Many lenders will lend up to 75% of the property’s value, but lending criteria has been tightened since the onset of the credit crunch and the number of lenders offering buy to let mortgages has greatly reduced.

There are many different types of buy to let mortgages: fixed rate mortgages, base rate tracker mortgages and discount mortgages. It can be advantageous to take out a BTL mortgage on an ‘interest only’ basis, because mortgage interest can be offset against tax owed on the rental income, but evidence of your associated repayment vehicle will be required.

This means that if you have a large interest only mortgage, the interest (and other tax deductible expenses) may reduce, or even wipe out, your tax liability.