Category ArchiveMortgage Advice
Mortgage Advice Tristan on 17 Nov 2009
Buy to let mortgages work very similarly to regular mortgages, with the distinction mainly being that the property being used as security for the mortgage is an investment property and not your home. Yes there are some other subtle differences and a vast array of regulations that govern the transaction, which I will cover here.
For a start, on a conventional mortgage the ability to borrow is governed by the deposit you can put down and your income. The larger the deposit, as a percentage of the property value, a reduced interest rate is available to the borrower. The income multiple is usually a multiple of the borrowers income, for example three times salary less annualised non-mortgage debt repayments.
With a buy to let mortgage, the income multiple is governed not by your income as the borrower, but is calculated by the interest payments that can be covered by the annualised rental income of the property. For example, if the property is rented for £795 a month, or £9,540 a year, and the rental cover is 100%, as long as the interest on the mortgage is no more than £9,540 a year, the lender will accept the deal.
In most cases, the rental cover is usually more than 100%, typically 125%, so in the above example, the annualised interest on the mortgage could be no more than £7,632, as once this is multiplied by 125% it would be £9,540.
How do you work this all out? I’ll give you an example:
Property Value: £180,000
Mortgage Size: £120,000
Pay Rate: 4.5%
Rental Cover: 130%
Monthly Rent: £795
Annualised interest: (£120,000 x 4.5%) £5,400
Rental cover: (£5,400 x 130%) £7,020
Annualised rent: (£795 x 12) £9,540
So in this case the annualised rent is greater than the required rental cover, so the lender would accept the case.
The other main consideration when looking at buy to let mortgages is that can cannot rent it to any immediate family.