When it comes to buying a property, there are two main options: a residential mortgage or a buy-to-let mortgage. Both have their advantages and disadvantages, and it's important to understand the differences between them before making a decision. A residential mortgage is typically cheaper than a buy-to-let mortgage. Interest rates on purchase-to-rent mortgages tend to be higher, and the minimum deposit is usually 25% of the value of the property.
Product fees are also usually higher for buy-to-rent mortgages, as lenders consider them to be more risky. Standard and purchase-to-rent mortgages are similar in many ways, but there are some crucial differences. Most residential mortgages are equity and interest loans, meaning that homeowners pay both interest and repay the loan itself. On the other hand, many purchase-to-rent mortgages have only interest, meaning that homeowners only pay monthly interest, rather than repaying the loan itself.
This generally translates into lower monthly payments for purchase-to-rent mortgages, but the mortgage must be repaid in full by the end of the term. Follow-up mortgages have variable rates, meaning that your monthly interest payments can go up or down depending on the Bank of England base rate. Initial fees on purchase-to-rent mortgages are usually significantly higher than those of standard residential offers, with figures of 1,999 pounds sterling not uncommon. Some lenders charge fixed fees, while others charge percentages of the amount borrowed. When applying for a buy-to-rent mortgage, lenders may set a maximum number of properties you can have in your portfolio and use different CRIs and representative interest rates depending on the number of properties you have.
You may also need to get permission from your lender to rent out your property; otherwise, you may end up in breach of your mortgage contract. Converting your residential mortgage into a purchase-to-rent mortgage allows you to generate income by renting your property. To determine if your rental income will be high enough to cover your mortgage, lenders will conduct a “stress test”. An independent mortgage broker can compare mortgages from all available lenders to help you find the best option for you. When buying a property with the intention of renting it out, it's important to consider all factors before making a decision. You may need a larger deposit than other investors to get a good deal, as the amount of mortgages available will be significantly lower.
Cuts to the tax relief for mortgage interest and to the attrition allowance have led some landlords to establish business structures for their purchase-to-rent portfolios.