Buy to let mortgages, how do they work?
Buy-to-let mortgages are loans taken out to buy a house an individual intends to rent out. This has become a popular practice as a way of generating income and not having to pay the repayments on the loan.
How a buy-to-let loan works is that the person who buys the property rents it out to other people, the rent generated from the property pays the mortgage and what ever is left over is counted as a profit. At first, the owner will see very little profit, as most of the money will likely be paid towards the loan.
This type of mortgage, like most other housing loans, is secured with a property, often the property that the landlord is renting out. The bank will hold the title to the home as security so that in the event payments are not made, they can foreclose on the property and sell the house to recover their money.
Buy-to-let loans often have a higher rate of interest attached to them as they are seen as a risk by many lenders. Buy-to-let loans have become very popular in recent years and banks are competing by reducing their interest rates to get more customers.
A buy-to-let loan is commonly used by people who either intend to rent the property over a number of years to pay off the loan or property developers who wish to fix up a home and flip it for profit.
In order for a lending institution to lend the money on the buy-to-let property, they will often require that the rental income generate enough to cover the entire mortgage and up to 30% profit after payments are made. The reason for this is that, often, rental properties are unoccupied for short periods, such as in-between tenants, or when the house is being repaired, as well as other charges, such as commissions to the letting agent or real-estate and repair or maintenance costs.
There are some risks involved in taking out a buy-to-let mortgage. The most considerable risk is that a borrower may have trouble renting the home. If a renter can’t be found, then it becomes the borrower’s responsibility to make the payments out of their own pocket until one can be found.
Problem tenants can also be a cause of a considerable amount of trouble for those with rental properties. At times, the owner of the property may experience delays or difficulties in getting rent, or worse, dealing with tenants who may vandalize or cause damages to the property. In situations like these, the owner is left to repair the home and keep up the mortgage repayments until the house can be made ready for new tenants.
To avoid these type of problems, it is highly suggested that a buy-to-let homeowner arrange landlord or renters insurance on their property. This type of coverage is offered by most insurance companies and in the event of the home being damaged by tenants, mortgages repayments and repairs are covered until the house is ready to be rented out again.