The principle of buy to let mortgages is generally self-explanatory - the buyer is looking for the funding to purchase a property in order to let it out to tenants and thereby earn a business income or a return on the investment in the bricks and mortar.
In so far as the funding is intended to purchase a property with the repayment of the loan over several tens of years, the principle has a lot in common with any other type of mortgage.
Because the loan represents a business or investment opportunity, however, there are a number of specific considerations which the mortgage lender is likely to take into consideration in a way that differs from mortgages for owner-occupiers. It might be helpful, therefore, to compare the similarities and differences.
Whether the property you propose to buy is to be your own home or to let to others in the form of a buy to let loan, it nevertheless remains the mortgage lender's security against the loan being advanced. If the worst comes to the worst, the borrower defaults on the mortgage repayments and the property has to be repossessed. Therefore, the lender needs to know that it represents sufficient market value when sold to cover the outstanding mortgage. As the lender seeks to protect his interest in the security being offered, it is likely:
- The mortgage lender arranges his own survey on the structural integrity of the property and its approximate value;
- A requirement that the borrower maintains adequate buildings insurance for the term of the mortgage is stated;
- A life insurance policy no less than the size of the mortgage advanced to cover the possible death of the borrower before the mortgage is repaid may sometimes be required; and
- Possibly, the borrower's payment of mortgage indemnity insurance premiums to insure the lender against the risk of the borrower defaulting on the repayments.
The single most important difference about buy to let mortgages compared to those mortgages used to purchase the borrower's principal residence is that the former form the basis of a business proposition or investment opportunity. The buy to let borrower's aim is to earn sufficient income from rents not only to repay the mortgage installments but also the repairs, maintenance and any management charges on the let property, with any surplus providing an income or financial return on the investment. In recognition of these aims, the mortgage lender is likely to adjust the criteria for advancing a loan accordingly. These criteria typically include the following:
- Instead of the mortgage applicant's income, the lender is likely to give first priority to the predicted rental income from the property;
- Although the level of earnings required is likely to vary from lender to lender, the typical qualification is that monthly rental income must be the equivalent of one and one-third of the mortgage instalments or an annual return that is more than 8% of the mortgage;
- An expected capital appreciation in the value of the property is also likely to be required;
- In most applications for let to buy mortgages, borrowers are typically expected to furnish a deposit of at least 15% of the purchase price of the property or properties.