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Mortgages

Buy-to-let Mortgage Guide

Although the owner-occupier housing market is showing signs of quieting down, the popularity of property as an investment grows. According to the latest report by the Association of Residential Letting Agents (October 2004), almost 60% of buy-to-let investors are planning to buy another property in the next year. But if you're buying to let, it pays to do your sums beforehand.

Buying residential property to let has become an increasingly popular investment choice. This is hardly surprising, given the recent upward surge in the property market. Buying to let allows you to borrow the lion's share of the property value. But you then keep the growth in the value of the whole property - not just your deposit. This process is known as 'gearing' and is the key to the attractiveness of buying to let.

Most people buying to let will need to take out a specialist mortgage. You will also need to put down a reasonable deposit - most lenders in this market will require at least 15% as a down payment, although many lenders are now asking for up to 30%.

The good news is there is now more choice in the buy-to-let mortgage market. Previously, landlords were forced to take out commercial mortgages that were more expensive, but nowadays almost every high street lender offers a buy-to-let mortgage of sorts.

If you have substantial equity in your own home, you may be able to look at re-mortgaging this and so obtain the funds to take out a small buy-to-let mortgage.

Because of the higher risks involved with letting out a property, buy-to-let mortgages are more expensive, although deals do vary. While you can expect to pay more than for your own residence, there are some very competitive fixed and discounted buy-to-let offers around.

Lenders take different approaches. Some will base the mortgage on your income in addition to the amount of rent they estimate can be obtained.

Some lenders will base the loan purely on the expected rental. The formula they use will also vary. Typically a lender will require the rent to be at least 130% of the mortgage payment. Others will offer a three times' salary multiple and half the rental income.

Others base the amount that they will lend on your salary and the existing loan commitments that you have, but then apply the 'deduction rule'. This means that they will lend up to 3.5 times your income (or whatever salary multiple applies), minus a representative figure for annual mortgage payments worked out at a pre-set level of interest. Say you earn £40,000 and have an outstanding mortgage balance on your property of £120,000. Under the rule, the annual mortgage repayments may be calculated as £10,000. This would be deducted from your salary to leave £30,000, which is then multiplied by 3.5 to give £105,000 - the amount that you are able to borrow.