If you’ve heard about buy to let mortgages, but are a little vague in the details, this is the article to expound your knowledge. A buy to let mortgage is an apropos name given to an endeavor that has been around for centuries, but for which banks now specifically have a dedicated loan.
Buy to let mortgages lenders separate regular mortgages from the buy to let types because there is more risk. As such the interest rates are slightly higher than a normal mortgage. There are a couple of different ways that lenders decide how much to lend. Mortgage payments need to be based on more than just the credit score of the applicant.
The evaluation of the property decides the total amount needed for some lenders. Part of the decision on lending is based upon the amount of rent individuals pay (totaled yearly). These amounts are anywhere from 120% to 150% of the total mortgage payments in a year. If the property value is deemed to be 100,000 pounds, the total mortgage for the year, at 5%, would be 5,000. The rent, therefore, would need to total at least 6,000 to 7,500 pounds.
A lender for buy to let mortgages can gauge the amount lent by multiplying your total salary by 3 and adding the rental totals divided by 2. So if your salary is 25,000 pounds a year and the income for the rental property would equal 7,500 pounds the total amount lent would be configured like this: 25,000×3 + 7500/2 = total amount lent (or 78,750 pounds).
More often a lender for buy to let mortgages will consider your current debt as well as your salary. They’ll configure the amount owed by figuring your total debt, subtracting that from your salary and then multiplying that by 3.5. So if you earn, for example, 30,000, your current mortgages and loans = 10,000 pounds that would be subtracted; so 30,000 – 10,000 = 20,000 x 3.5 = 70,000.
Every lender has their own method of deciding the amount of the loan and the interest rate that applies. It’s not a good idea to apply at several lenders, rather get the information directly from several lenders and make a decision with whom you wish to apply.
The benefits of property ownership in a let to buy mortgage are numerous. The most important being a tax break. While a general salary from a rental property has a 20-40% tax rate, generally a portion of those taxes can be reduced by deducting things like maintenance and interest payments. Another great benefit is the passive income that can eventually be had if you have several properties and a property management company.
A buy to let mortgage is definitely a positive step towards a passive income.