Benefits of buy-to-let mortgages
Key benefits of buy-to-let mortgages include:
- Leveraging property to expand your rental portfolio
- Diversify your income streams
- Benefit from capital appreciation from additional investments
Buy-to-let mortgages are specialist long-term finance products for new and professional landlords, and are typically the most appropriate way of financing a long-term investment in property purchased to generate a rental income.
What is a buy-to-let mortgage?
Buy-to-let finance is a type of mortgage designed for individuals who want to purchase a property with the intention of renting it out to tenants. Unlike traditional mortgages, buy-to-let finance is specifically designed for rental properties and may come with different terms and conditions. These loans can be obtained from a variety of lenders, including banks, credit unions, and specialist lenders.
A commercial investment mortgage is a type of mortgage loan used to finance the purchase of a commercial property that the borrower intends to rent out to tenants. This type of mortgage is different from a commercial owner-occupier mortgage, which is used to finance a property that the borrower intends to occupy and use for their business operations.
These types of facilities are commonly used by investors who wish to purchase commercial property that they don’t have the funds to purchase without external finance. Commercial investment mortgages can also be used to raise money from existing properties that are owned without any existing debt (unencumbered properties) or refinance existing facilities.
A lender will evaluate your creditworthiness and other factors to determine whether you’re eligible for the loan, with consideration on both the rental income generated by the property, and the value of the proposed property for them to take security over. You will need to evidence a good level of DSC for the mortgage repayments. “DSC” stands for Debt-Service Cover and is the ratio between your mortgage repayments and rental income. If your property generates £5,000 per month and your mortgage costs are £4,000 per month then you would have a DSC of 1.25 (5,000/4,000).
The amount you can borrow will depend on the value of the property you are offering as security up to a maximum LTV, for example, “65% LTV”. This stands for “Loan to Value” and means if your commercial premises was worth £1,000,000 the funder would lend a maximum of £650,000.
Interest rates will vary depending on your unique credit and affordability circumstances. Facilities can be available on an interest-only basis, or part-and-part with some of the facility on an interest-only structure and the remainder on a capital-and-interest repayment arrangement.
How does a buy to let mortgage work?
A commercial owner-occupier mortgage lender will typically assess a facility as follows:
- Loan amount: The lender will provide a loan of to a maximum level relative to the value of the property you are offering as security. Funders may also limit this depending on the rental income generated by the property and their DSC requirements.
- Deposit: You will be expected to provide a down payment as part of the purchase of the premises, often a minimum of 30% of the purchase price/value of the property. This isn’t required when refinancing property you already own.
- Eligibility: You will need to meet certain underwriting requirements, such as a strong credit history and DSC. Funders will often be interested in your prior experience as a landlord and wider property portfolio. Funders may also be interested in the terms of your commercial lease and the nature of the tenants you have in place. We will request information on your full portfolio to strengthen our proposals to funders, as well as particulars on your tenants and lease arrangements where necessary.
- Loan term: Commercial investment mortgages are often structured on repayment profiles up to 15 years, with an initial fixed period of 3 – 5 years.
- Repayment: Typically repayments are made by a fixed monthly direct debit. Some facilities are on a variable rate, whereas others have an initial fixed-interest rate period that then switches to a variable rate after the fixed period ends. Some funders will permit you to make overpayments and/or settle in full, often with benefits from settling early. Some funders may, however, apply a penalty for settling too early into the facility within the initial fixed-rate period.
