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Why is Buy-to-Let Mortgage More Expensive?

Learn why buy-to-let mortgages are typically more expensive than residential mortgages and what you need to know before applying for one.

Why is Buy-to-Let Mortgage More Expensive?

Purchase-to-rent mortgages are typically more expensive than residential mortgages, as banks consider tenants to pose a greater risk than occupying landlords. Mortgage providers view buy-to-let mortgages as riskier investments, due to the potential for landlords to have difficulty collecting rent and keeping their property occupied. Interest rates and product fees tend to be higher, and initial fees can be as high as £1,999. Some lenders charge fixed fees, while others charge a percentage of the loan amount. Additionally, lenders may impose restrictions on the number of properties in a portfolio, and use different credit rating indexes (CRIs) and representative interest rates depending on the number of properties owned.

To obtain a buy-to-let mortgage, some lenders may require a “consent to rent” agreement, while others may require switching to a buy-to-let mortgage. Comparison websites are a great resource for finding the right mortgage. Consumer BTL mortgage counseling, organization, lending and management are regulated by the Financial Conduct Authority (FCA). When a property is unoccupied or rent is not paid, there will likely be gaps in payments that require a financial cushion to cover mortgage payments. However, this doesn't mean that anyone can easily obtain a purchase-to-rent mortgage; applicants must provide details of their mortgage, cash flow projections and business models for each property they own.

Lenders will assess the amount of rental income against monthly mortgage payments. The unbiased mortgage calculator can help determine how much can be borrowed and what the monthly cost will be. Homeowners must pass stringent affordability tests to qualify for attractive mortgage offers. Remortgaging for rent is often done to purchase an additional property and use the capital from the first as a deposit for the second. Homeowners can no longer deduct mortgage interest from rental income to reduce taxes. Lenders must perform a 125% test, which means that projected rental income must represent at least 125% of the landlord's mortgage payments.

If segmenting could benefit you, it's best to discuss it with a mortgage broker. Homeowners who are considering buying a new property or whose fixed-rate mortgages are due soon should be aware of the rising cost of purchase-to-rent financing; some lenders have recalled their products or returned with products with much higher interest rates.

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