Most purchase-to-rent mortgages are interest-only, meaning that you only pay the interest and nothing else. This keeps your monthly payments low, which increases your profit margins from the rent received. Interest-only mortgages are popular with homeowners who buy to rent, and there are good reasons for that. Buying a purchase-to-rent mortgage is often for investment purposes, and an interest-only mortgage can keep monthly costs to a minimum, especially compared to an amortization mortgage. With an interest-only purchase-to-rent mortgage, you'll only pay interest on the loan.
The balance of the mortgage itself is paid when the term expires. This is why monthly mortgage costs are low compared to an amortization mortgage. Most homeowners choose this route to save more investment income each month. The excess rental income can then be used to purchase more properties or maintain the existing rental purchase. That said, the loan will still need to be repaid at the end of the term.
Landlords usually do this by selling the property. Yes, it is possible to obtain a purchase-to-rent mortgage in exchange for amortization. With this agreement, you would repay part of the loan in addition to the interest each month. As a result, your monthly payments will be higher compared to an interest-only agreement. This is one of the main reasons why homeowners prefer interest-only mortgages to amortization mortgages for real estate investments. The main advantage of having an interest-only mortgage is that monthly payments are usually much lower.
This is because you would pay only the interest on the mortgage, which is generally a fixed amount each month. Many homeowners will switch to another purchase-to-rent mortgage once their introductory period ends. As a result, interest-only payments will remain low during the initial term of the mortgage. This period can be from two to five years. Once the term expires, remortgaging a purchase to rent can keep interest rates low.
Saving money every month can be very advantageous, as it can generate enough profit to buy another property or buy to rent. This is often how homeowners can increase their property portfolios to generate a sizeable income each month. Many buyers to rent lenders don't have any minimum income requirements for purchase-to-rent mortgages. This is often because the investment property itself will generate income. As a result, lenders will insist that monthly rent figures exceed those for the mortgage.
This can vary, but rental income is usually between 125 and 145% of the mortgage, depending on the lender. Because some lenders have no income requirements, it may be easier to buy a purchase-to-rent property with an interest-only mortgage than with a repayment mortgage. That's because an amortization mortgage will incur higher payments every month, leading to less rental income. This can be particularly useful if you're concerned about meeting a lender's affordability requirements. Interest-only mortgages to buy to rent can also be tax efficient. That said, this depends on how your finances and investments are organized.
Despite the changes in tax laws for homeowners, there may still be some tax benefits to take advantage of. It's important to understand that you can save money on taxes depending on how you've organized your real estate investments. Consult a tax specialist if you need more information. The main disadvantage is that you won't own your investment property at the end of the mortgage term. This is because you're not paying anything to cover the actual mortgage balance.
Some lenders may allow you to make principal repayments during the term of your mortgage, reducing your balance each time. This depends on your lender and any early repayment fees that your mortgage includes. As a result, you'll actually pay more in terms of interest compared to an amortization mortgage. This is because the interest level remains the same, since your outstanding balance will not be reduced. This is a risk, as property prices could fall when the mortgage term ends.
Some lenders won't approve this repayment plan either. The amount you can borrow depends on the lender you went to. That's because each lender has its own affordability assessment. To get the best buy-to-rent deals, it's often recommended to use deposits of around 40%. This is because lenders tend to offer their best deals at 60% between loan and value. It's understandable that a 40% deposit isn't possible for most investors.
However, this is where you'll find the best deals usually offered. Most lenders that buy to rent will require at least 25% for an interest-only mortgage, while some lenders may accept only 15%. Lower deposits mean higher rates and fees, so keep that in mind. Paying above market rates can have a negative impact on your rental earnings, so it's essential not to overlook it. On normal properties, it's possible to get competitive mortgage rates with a 25% deposit.
It may be financially viable to spread your deposit between two properties if you have a very large deposit. This can generate even more rental income. If you really want the best deal, talk to our consultants who can compare thousands of offers. This will ensure that you don't overpay and we'll also guide you from start to finish throughout the process. Because buying to rent isn't always safe, there may be periods when your property is empty and you don't make money from renting. An interest-only purchase-to-rent mortgage helps offset this risk by keeping monthly payments low so that you don't have to find funds for higher repayment mortgages every month out of pocket expenses.
The advantage of an interest-only mortgage is that your monthly payments are much lower than they would be in a typical principal repayment plan resulting in greater surplus rental income after related costs which can be used if any unexpected costs arise or reinvested in modifications.
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