Buy to Let Mortgage Rates Explained
Buy to let mortgage rates and costs are closely related to those of a standard home loan.
New or established landlords will find buy to let finance options costs a little more than a residential mortgage, but are available as similar products.
Buy to let borrowers should expect to pay 1%-2% more than a lender’s standard variable mortgage rate.
Costs of taking out a buy to let mortgage vary between lenders – some charge booking fees and arrangement fees that can add up to 2% of the loan value to the transaction.
A big difference between residential and buy to let mortgages is how the lender calculates how much of the purchase price is financed.
Borrowing for a buy to let depends on some key factors:
- Loan-to-value – this is the percentage of the value of a home the lender is ready to advance as a mortgage.
- If a home is priced at £150,000 and the lender is offering a maximum of 75% loan-to-value, then the maximum loan would be £112,500
- The point to watch here is mortgage offers have an either/or clause in the small print which says the lender will advance 75% of the valuation or purchase price, whichever is the lower.
- That means you could agree a purchase price of £150,000 for a home, but the surveyor’s valuation could be just £140,000. In that case, the lender would only advance £105,000, leaving the buyer to make up the difference as cash or having to renegotiate the purchase.
- Rent cover – rent cover is a complicated formula lenders work out to make sure the rent paid by a tenant is enough to cover the cost of the loan.
- The mortgage offer will say something like the rent cover has to match 125% of the interest only monthly mortgage repayment.
- As an example, rent cover on a £140,000 mortgage at a 5% interest rate is equivalent to a monthly rent of £729. If the rent is less than £729 a month, the lender will cap the borrowing.
Loan-to-value and rent cover restrictions mean buy to let investors have to consider the property price and rent before making a mortgage application.
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