BTL Mortgages explained

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Interest only mortgages were popular mainly due to the fact that you only have to pay off the interest each month, however after a certain period you are expected to pay off the rest of the loan in full by some other means.

This type of mortgage was extremely popular with buy-to-let landlords, especially as it meant that they could buy a property quickly and not have to make hefty repayments until they made some money back. However, now we have seen the down sides of interest only mortgages it is important for landlords to look at other options, which is what we look at in detail here:

Repayment Mortgages

This is probably one of the simplest kinds of mortgage, as you pay back part of the loan each month along with a small amount of interest. The amount you will have to pay back each month depends on a number of factors, including how much money you borrow, what interest rate your bank charges and how much you put down as a deposit. For example, if you save a large amount for a deposit you are likely to get a better deal from the bank when it comes to interest, meaning that you will save money in the long run. Generally you will be expected to make payments for between twenty and thirty years for your mortgage, and your bank will send you regular statements showing how much you still owe meaning as a landlord you can easily see your outgoings and how much money you owe in total.

Fixed Rate Mortgages

If you are planning on getting a repayment mortgage you will generally find that for the first few years you will have to pay a fixed rate of interest that will be higher than your normal interest. This can often be difficult for buy-to-let landlords, especially if it takes a number of months before they find tenants and start making an income off of a property. You therefore need to make sure you go to a number of banks to find out how long their fixed rate term will be and how much interest they will charge during this period. Remember, you don’t have to get your mortgage with your usual bank, so make sure you shop around and get the best possible deal!

Variable and Tracker Rate Mortgages

Once you finish the fixed rate term of your mortgage you will find that most banks choose to convert your loan to a variable rate mortgage, which means that your interest rate can be changed throughout time according to your lenders standard variable rate. Once a year your bank will calculate their standard variable rate according to their interest rates and the rates set by other banks. At the moment variable rates are generally lower than fixed-term rates due to the fact that interest rates in general are quite low, so as a landlord once you get to this stage you will start to notice that your income is going further and your outgoings will be reduced.

Some banks offer tracker rate mortgages instead of variable rate mortgages which are not based on their standard variable rate but against an external source’s interest rates, such as the Bank of England. If you are not sure which one would be right for you then you need to arrange a meeting with your bank manager (or a bank manager at another branch) and discuss your options.

Spending time researching and understanding all your options when it comes to getting a mortgage for a property is of the utmost importance for landlords, especially as your repayments will be one of your biggest outgoings each month along with maintenance costs and landlord insurance. Don’t forget that you will need to bring a number of documents with you when applying for a mortgage, and you will also need to find out if there are any rules concerning paying back your loan early. Make sure you also look out for any extra charges, as often when you sign up for a mortgage with a low interest rate you will find that the charges on top of this actually make your mortgage extremely expensive.

Mortgages often seem confusing, and it’s often tempting to try and save money in the short term, but as we have seen with interest only mortgages this could lead to long term problems. Ask as many questions as you can before committing to a deal.

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