Why most buy to let mortgages are interest only
Buy to Let mortgages, unlike residential mortgages, are mostly interest only mortgages. This is because buying a property to let it out means that you will be generating an income from the purchase itself, which then generates the income to pay the interest on the mortgage each month, along with providing you with a return that you can then use to build up a lump sum to help to pay off the mortgage at the end of the term. As many buy to let mortgages do not run to their full term due to the property being sold, the money raised from the sale is then used to make the lump sum payment.
Why you can’t be complacent
Even though you will have an income coming in from renting out your property you will still have to make sure that you keep track of your finances as it is always a possibility that the value of your property will decrease, which could then leave you with a shortfall in the money provided when you come to sell the property. Therefore in order to ensure that you don’t end up with a large bill to pay you should generally set your rent to be significantly more than 125% of your mortgage payments and then use the capital that is generated in order to have a payment plan that will give you a cash lump sum should you need it in order to pay off any remaining mortgage when you come to sell the property.
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Another reason why most buy to let mortgages are interest only is because of the low loan to value ratio that many mortgage deals demand. In many cases up to a 40% deposit is required in order to secure a good rate buy to let mortgage. The fact that you can generate this size of deposit means that you present a lower risk than someone who can only generate a 5% deposit. Many buy to let mortgage lenders will accept a 25% deposit, though there are a handful that will provide you with a buy to let mortgage for as little as 15% deposit. However the smaller the deposit you have, the higher the interest rate you can expect to pay, and you will also find that these mortgages have a percentage of loan application fee, which can be some of the most expensive application fees especially for larger loans.
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