Buy to Let Mortgages

In recent years buy to let mortgages have become very popular as more people look for alternative ways to invest their money. A buy to let mortgage or portfolio can give the opportunity to provide an additional income or allow for capital growth or both.

Until the late 1990's there were very few lenders that would lend to inexperienced landlords unless the loan to value was no more than 75%. Slowly more and more lenders became more liberal with their lending criteria and also the loan to value to which they would lend and it is now possible for an inexperienced landlord to get a 90% mortgage on a buy to let property as long as the rental income is sufficient to cover the mortgage payment.

Below are some of the main considerations and points to bear in mind with buy to let mortgages, you can click on the bold underlined headers for in depth information.

Buy to let for capital growth or to create an additional inome or both? - Buy to let can be a winner in two ways, you could receive a greater rental income than the mortgage payment and the value of your investment could also rise.

The tax implications of buy to let properties - Click on the heading for some basic information on this subject.

Buy to Let Rental Income Coverage- When buy to let mortgages started to become popular the lender would usually require the rental income to be at least 125% to 130% of the monthly mortgage payment. This is easily achievable in most cases if the loan to value is quite low and the property is particularly suitable for renting out, such as a flat or small house but at higher loan. Lenders have now become more flexible with the rental income cover with some now only wanting 100% of the mortgage payment covered. Some lenders will now also take personal disposable income into account

Loan to Value - The typical minimum depost is 15% but some lenders offer buy to let mortgages with only a 10% deposit.

Commercial Buy to Let - There are a growing amount of lenders prepared to lend on commercila investments such as shops and offices. The net rental income is usually higher but if the investment becomes unoccupied it can take longer to get a new tenant in place paying rent.

Finding the Right Buy to Let Property - With it becoming harder for first time buyers to get on the property ladder, more and more people are choosing to rent in the short to medium term. They typically want flats and smaller houses. This market is the most desirable giving the best chance of achieving a high net profit after deducting the mortgage payment from the rental income and other costs.

Buy to Let for Capital Growth - Some professional landlords and investors look more at the likelihood of capital growth as much or more than the net rental income. Certain geographical areas are seen to still have the potential for rising in prices faster than inflation and are therefore purchased more for a rise in the value of the property rather than net rental income.

Building a Buy to Let Portfolio - Many people by chance or not start with one buy to let property and once they are comfortable with managing one property go on to add more. There have been many examples of people buying one, seeing it increase in value and then refinancing it to release a deposit for the next one.

Research the market - If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits. Read Buy to Let guides which give a comprehensive run down on the subject and catch up with the latest news in our buy-to-let channel.

Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. If you know someone who has entered the buy-to-let market, ask them about their experiences, or chat with other investors on This is Money's message boards.

Choose a promising area - Promising does not mean most expensive or cheapest. Promising means a place where people would like to live and this can be for a variety of reasons. Where in your town has a special appeal? If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?

Have a look at the rental market and homes to buy in your town on www.findaproperty.com or www.rightmove.co.uk

Do the maths - Before you think about looking around properties sit down with a pen and paper and write down the cost of houses you are looking at and the rent you are likely to get. Traditionally buy-to-let lenders want rent to cover 125% of the mortgage repayments, although some are relaxing this, and interest rates are higher. Most also look for a 15% deposit, which protects against falling prices.

Will your investment work out? What will happen if the property sits empty for a month or two?

Shop around - Do not just walk into your bank and building society and ask for a mortgage. It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make millions in profit.

Think about your target tenant - Instead of imagining whether you would like to live in your buy to ler property, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and need a blank canvas.

Don't be over ambitious - We have all read the stories about buy-to-let millionaires and their huge portfolios. In most places the days of double digit house price rises are gone, so experts say invest for income not short-term capital growth.

Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then be able to use it as a deposit for further investments. Use This is Money's account finder to find a suitable savings account through our selected partner.

Consider looking further afield - Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. The advantage of a property close by is being able to keep an eye on it, but if you will be employing an agent anyway they should do that for you.

Cast your net wider and look at towns with good commuting links, that are popular with familes or have a sizeable university. Use www.findaproperty.com to look at different areas.

Haggle over price - As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount. If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through. This can be a sizeable asset when negotiating a discount.

Know the pitfalls - Before you make any investment you hould always investigate the negative aspects as well as the positive. The general consensus is that house prices are relatively stable, but they may drop slightly or even considerably. If that is the case will you be able to continue your investment? Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year – this gives a substantial buffer. Homes often need repairing and things can go wrong. If you do not have enough in the bank to cover a major repair to your property, do not invest yet.

Consider how hands-on you want to be - Buying a property is only the first step. Will you rent it out yourself or get an agent to do so. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong. You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs. If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal ervice. Select a shortlist of agents big and small and ask them what they can offer you. Ask for tips on This is Money's message boards .

The tax implications of buy to let properties - Click on the heading for some basic information on this subject.