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Buy-To-Let Mortgages Explained

May 15, 2008
According to figures, 10% of all homes bought in 2006 were via the buy-to-let mortgage option. Accounting for over 17.5 billion, it's a number that looks set to grow, if 2007's trends are anything to go by. Looking at what a buy-to-let mortgage offers, it perhaps shouldn't be such a surprise that they're growing in popularity.

Yet there are still a lot of people who don't understand them, or that they offer an excellent opportunity for a homebuyer. So what exactly is a buy-to-let mortgage, and why are they becoming increasingly popular with the home-buying public?

A Practical Investment

Perhaps the best way to look at a buy-to-let mortgage is as an investment opportunity. With the UK housing market becoming harder to get into, with rising costs and interest rates, more and more people are renting. Combine this with the fact that there are fewer couples now, and more people are choosing to live on their own in a rented flat or similar, and the potential for making extra income from this type of mortgage is excellent.

Buying a house simply to let out has 2 major benefits for the owner - it gets you onto the property ladder (if you're not already on it), and it also goes a long way to paying your mortgage for you. For example, say you have a mortgage at 600 per month - most 2-bedroom houses rent out at an average 500 per month, so the rent almost pays for the house in itself. Add to this the continuing growth in value of your home, and the fact that you can eventually move in yourself if you choose to do so, and it's really a win-win situation.

The Costs

If there's one thing that offsets taking out a buy-to-let mortgage, it's the ongoing costs you'll need to take care of. Since you're now officially a landlord, you will need to make sure that any maintenance that your tenant needs is taken care of. This can range from simple building repairs to more costly items, such as leaky roofs or burst drains. However, one way to look at this is that you would need to make these repairs anyway if you were living in the property - the only major difference is that you won't be able to put them off as much now that you have a tenant to keep happy.

Other costs involved include specialized insurance to cover the tenant as well as the property; decorating costs; and things like whether or not the property will be furnished or not. You can usually charge more rent for furnished properties, but then you also have to look at potentially more repair and insurance costs, especially if you're providing washing machines, fridge freezers, etc.

The Benefits

Perhaps the biggest difference in taking out a buy-to-let mortgage is the actual approval method itself. Whereas normally your income would be the major deciding factor when applying for a mortgage, lenders will instead look at what they see as the "earning potential" of the property in question. If it's in a good area that's much sought-after, there's a good chance you'll be approved for the mortgage even if your own income wouldn't normally make you eligible.

With all these benefits and more, buy-to-let mortgages can only continue to grow in popularity, and it might not be too long before they become the norm as opposed to the alternative to buying a home.
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