Buy-to-let mortgages are typically higher than standard mortgage rates due to being considered a higher risk for lenders.
These types of mortgages are designed for landlords who typically taking out a mortgage to buy a property that they will immediately rent out. However, as rental income isn’t guaranteed, it is a higher risk for the lender.
For a buy-to-let mortgage to be a good strategic decision, the rental has to be successful. That means minimising vacant periods, maximising rental profits and avoiding spending on big costs such as large-scale repairs.
Working with J Property Management can make sure that your rental property is as profitable as possible. From ensuring reliable tenants all year round and guaranteed rent collection to catching repairs and maintenance issues early on, we’ll ensure that your rental property is always making you money. Get in touch with the team today to find out how we can help.
Why are Buy-to-Let Mortgage Rates More Expensive?
There are a few reasons why buy-to-let mortgages come with higher rates including:
Riskier for lenders – the main reason why buy-to-let mortgages come with higher rates is that they run a higher risk for lenders. Most people choosing to borrow with a buy-to-let mortgage are planning to use the rental income to cover monthly mortgage costs. As this is not guaranteed, there is a higher risk of borrowers defaulting on their payments.
Tenant variability – when lenders give the money for a buy-to-let mortgage, the landlord takes over all responsibilities for the payments. Landlords need to choose reliable tenants who will pay rent – on time, every time. However, tenant sourcing is not always easy and landlords sometimes get it wrong. This can mean missed payments, late payments, vacancies or even costly legal consequences.
Vacancies – if there are vacant periods between tenants, there will be no rental income to cover mortgage costs. Landlords need to minimise vacancies as much as possible so that they always have a steady income source and can pay their monthly mortgage bills.
Larger deposits – buy-to-let mortgages are more expensive from the offset as they usually require a higher initial down payment (generally starting from 25%).
Additional fees – there are other costs to take into account when taking out a buy-to-let mortgage including higher stamp duty and higher arrangement fees. Also, with buy-to-let mortgages, it is worth noting that rental income will be subject to income tax.
Buy-to-let mortgages are typically higher than standard mortgage rates due to being considered a higher risk for lenders.
What is the Difference Between a Buy-to-Let Mortgage and a Standard Mortgage?
Buy-to-Let Mortgages
A buy-to-let mortgage is specifically designed to purchase a property that will be rented out. Here are the key features of a buy-to-let mortgage:
- The owner does not live there but rents the property out to tenants
- Higher risk resulting in higher buy-to-let interest rates
- Interest-only repayments; borrowers only pay interest each month and must pay the capital in one lump sum at the end of the loan term.
- Less regulation than standard mortgages.
- Borrowers are assessed on the potential for rental income, not the borrower’s regular income.
Standard Residential Mortgages
A standard mortgage (also known as a residential mortgage) is when you take out money to buy the home that you are going to live in. Here are the key features of a standard mortgage:
- The owner uses the property as their primary residence
- Lower risk, lower interest rates
- Can have different repayment types, the main one being a mix of interest and a portion of the capital paid each month.
- Stricter lending criteria with lenders looking at the borrower’s income and credit history. The lending criteria for other types of finance like development or bridging may vary.
How Much More are the Rates for a Buy-To-Let Mortgage than a Standard Mortgage?
When speaking purely about rates, buy-to-let mortgage rates are around one percentage point higher than residential mortgage rates. However, there are other factors making buy-to-let a more expensive type of mortgage.
There is less choice with buy-to-let mortgages when it comes to repayment structure. Most buy-to-let mortgages are interest-only. Payments are lower in the short term – with borrowers just paying the accrued interest costs per month, without having to pay off the capital balance. However, the borrower will need to pay the entire capital balance at the end of the term.
Other expenses could come from switching from a standard mortgage to a buy-to-let mortgage. This comes with additional fees of its own – including early repayment charges and valuation fees – that could make it an expensive remortgage strategy.
Why Get a Buy-To-Let Mortgage Instead of a Standard Mortgage?
Choosing to get a buy-to-let mortgage instead of a standard mortgage makes sense if your intention is to rent out the property from the start. If your plan is to live in the property that you are buying, you should take out a standard residential mortgage.
It is still possible to take out a standard mortgage if you want to rent out the property in the future but most lenders will have a fixed amount of time that you will have to live in the property first. So, if you want to rent out the property immediately or within the first year, a buy-to-let will make more sense.
Additionally, if you get a standard residential mortgage and immediately rent out the property it is considered a breach of contract. This could impact your existing mortgage and could impact getting a mortgage in the future.
The lender risk assessment is also different if you choose a buy-to-let rather than a standard mortgage. Buy-to-let mortgages will consider potential rental income whereas a standard mortgage looks at current income and creditworthiness. If you are going to take out a buy-to-let mortgage, you should have a solid strategy for renting out the property, maximising occupancy and guaranteeing a stable rental income.
When you purchase a property with a buy-to-let mortgage, you are acknowledging that it is a business asset, rather than your home. This also has specific legal and financial implications that you need to be aware of before deciding which mortgage is better for your circumstances.
Are Buy-to-Let Mortgages Worth It?
Yes, buy-to-let mortgages are worth it if your plan is to buy a property and immediately rent it out.
If your purpose is to rent out the property and never use it as a primary residence, it is worth getting a buy-to-let mortgage from the start. This avoids having to wait to rent it out, risking any financial and legal implications of going against the mortgage conditions and paying fees to switch from standard residential to buy-to-let at a later date.
However, if you are taking out a buy-to-let mortgage, you need to ensure that you are going to meet monthly payments. You can do this by optimising your rental property – setting the right rental price, ensuring reliable tenants, carrying out regular maintenance checks and staying on top of legal and compliance obligations.
Optimise Your Buy-to-Let Property with J Property Management
At J Property Management, we know that your rental is one of your greatest assets – that’s why we help you get the best for your investment. From sourcing reliable tenants and ensuring occupancy to guaranteeing punctual rent payments each month, we want to make sure your property gives you a stable income that can help you meet your buy-to-let mortgage payments.
Whatever your property management needs, we can help you find the solution to maximise your investment.
