Category: Mortgages

Is a Buy-to-Let Mortgage Worthwhile?

A buy-to-let mortgage is a loan which second home owners get to cover the cost of borrowing for buying a house. They will then rent out the house to generate an income. It is worth understanding a bit about these types of mortgages before getting one.
A buy-to-let mortgage is the same as any other mortgage in that it is used to cover the price of buying a home and you repay it over a long term usually between twenty and thirty years. There are some differences though, which make them worth thinking hard about. The first is the deposit. A standard mortgage usually requires a deposit of around five percent. A buy-to-let mortgage usually requires a deposit of about a quarter of the value of the house. This is a significant chunk of money. They do this because they feel there is more risk that you will not be able to make the repayments. This is perhaps because you may have another mortgage on your main home as well, you may not be able to rely on the rental income for a constant income to cover the repayments and they want to make sure that you can really afford to take on the loan. Some people may not be able to save up this much money and therefore may not be able to get this sort of mortgage at all.

The second difference is the interest rate. A buy-to-let mortgage gas a higher mortgage rate than a standard mortgage. This is again probably due to the perceived risk and so it could be a very expensive loan to hold. You need to consider that you will need to keep making those repayments, even if you do not have a tenant in paying the rent for you. Therefore you will need to keep some money by to cover those payments in this circumstance. It is obviously worth comparing and trying to get the best rate, but it may still be so high that it is not worth borrowing.

If you can afford to buy a property outright, this is far better idea than getting one of these expensive mortgages. With interest rates low at the moment, they may not seem hugely expensive but while they are very low, there is only one way they can move and that is upwards. You need to consider whether you will still be able to pay the repayments as the interest rates go up. You may not be able to increase rent that much as you could risk losing your tenants to landlords who do not charge so much and so you need to be careful. Think about whether you still feel that the investment is worth it.

It is worth considering that the increase in value in the house should make the investment worthwhile. However, there is always a risk that the house will not increase in value or will not go up enough to cover your costs. This could depend on how long you are prepared to hold onto the property as the longer you keep up, the bigger the chance that it will increase in value and the larger the increase should be. Remember that you will need to pay for insurance, repairs, safety checks and possibly a letting agent as well and the rent that you charge will need to cover these as well as the mortgage repayment. It could be a lot to ask. It is best to make sure that you can personally cover all of this just in case you have no tenant in and decide whether you think it is worth the risk of investing in it. It can very well depend on the asking price housing market, rental market, likely rental income and how much income you have. There are a lot of factors to consider and if you take the mortgage out of the equation, by buying the house outright, you will have less risk as your costs will be a lot lower. It is likely that the house value will increase enough to cover those costs and you will have more of the rental income left as well to cover costs and possibly to give you some profit as well.