What to consider when choosing a buy-to-let mortgage
Buy-to-let mortgages may be tailor-made for landlords, but that doesn't mean you should enter into one without some careful consideration and a great deal of research. There are several factors you'll need to think about in order to get the best deal and make the most of your investment.
In the current climate, making a profit on property is not as easy as it once was. With this in mind, getting a buy-to-let mortgage on a home should always be viewed as a long-term project.
Having said that, the buy-to-let market remains extremely popular and the prospect of buoyant rental yields continues to attract new investors. According to figures published by the Council of Mortgage Lenders (CML) in 2012, the total number of buy-to-let loans in the UK now stands at over 1.4 million, with a combined value of £159.4 billion.
It's worth remembering that people usually invest in buy-to-let property with one of two strategies in mind. Some investors target high rental returns, while others aim for capital growth.
It is generally true that properties which increase more in value provide lower rental returns, while homes that offer higher rental yields are less likely to achieve long-term capital growth.
Here are a few key considerations for first-time landlords and those looking to extend their rental portfolio with a new buy-to-let mortgage.
Get to know the market
Before you even begin to compare mortgages, you'll need to find out all there is to know about the local lettings market. Think about supply and demand, look at other houses on the internet and talk to local letting agents to find out how much other landlords are charging to rent properties in your chosen area.
Even if you've already decided on a property, you'll need to know how to competitively price your rent so that tenants in the area are likely to accept it.
Get your calculator out
You'll need to do some sums before you go ahead with any buy-to-let mortgage application. You have to be sure of two things: firstly, that you can afford the initial investment, and secondly, that the buy-to-let is likely to be profitable in the long-term.
The average maximum loan-to-value available on buy-to-let mortgages is currently 75 per cent, according to the CML. This means you'll need a sizeable deposit, while the rates you're offered are likely to be considerably higher than those on a residential mortgage. You could also face a hefty arrangement fee to get a mortgage with the most attractive rates.
When evaluating the feasibility of specific deals, consider how much your mortgage costs are likely to increase if rates go up. Remember that rising interest rates could potentially cancel out any profits you make.
To find the right buy-to-let mortgage for your needs, you'll need to consider the other expenses that come along with being a landlord. It's advisable to set aside money for maintenance and unexpected repairs, while you'll also need to arrange buildings insurance (for more information,click here).
Also, remember that you're likely to experience rental voids when the property is sitting empty and no money is coming in from tenants. According to advice from the National Landlords Association, you should allow for the property being vacant seven per cent of the time.
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