Buy to let Mortgage types

We recommend you take advice over the choice of buy to let mortgage scheme. The difference between the various schemes can amount to a lot of money.

Free advice is available from Mortgages Direct with regards choosing a mortgage.

If you already have a buy to let mortgage, then we would recommend you review your mortgage periodically. A buy to let remortgage is quite straightforward 

You can get a feel for the mortgages available by visiting our buy to let best buys.

Payment Methods

While there are many different interest rate options, there are just two types  of payment method; interest only and repayment (capital and interest).

With an interest only mortgage you pay the interest only to the lender. Some lenders may expect you to take out an investment to run alongside your mortgage, which you hope will pay off the  loan at the end of the term. Mortgage  lenders are fairly flexible about  what investment method is used to pay off the loan and popular choices have  been endowment policies, unit trusts and pensions.

With a repayment mortgage each payment made pays both the interest and  a small part of the capital. With this type of mortgage your mortgage loan  will be paid off by the end of the term.

With a repayment mortgage you are using your capital to actively reduce  your debt at whatever the prevailing building society interest rate is.  With a interest only mortgage you  hope that your invested capital will achieve  a better rate of return than the mortgage lender interest rate.

Interest rate Options

There are many different mortgage interest rate options available:

Standard Variable rate This is the lender's normal variable interest rate. 

Fixed Rate allows you to fix the interest rate of your loan so that  for a set period you have  the reassurance of knowing that your mortgage payments will not alter.

A Capped Rate fixes a upper ceiling to the interest rates so that  in the event of rising interest  rates  you will not pay any more than  the limit set by the cap. If rates fall below the cap then your mortgage payments will reduce.

Fixed and Capped rate mortgages are useful for those who are budgeting and need to know that their mortgage payments will not exceed a set  figure.

Discounted Rate mortgages allow a discount to the standard variable  interest rate for a set period.

As an incentive to attract new clients some companies may offer a lump  sum Cash back.  These are obviously useful if cash is needed at the  outset, however the opening interest rates may not be as attractive.

Flexible mortgages , also termed Australian mortgages have become  increasingly popular in recent times. They enable the borrower to actively  manage their mortgage perhaps by  altering the monthly payments or by paying  off lump sums. Other options include the facility to take payment holidays  and to borrow further amounts.

Early repayment charges: To attract new borrowers, mortgage lenders may  offer an introductory discount or some other incentive. This will invariably  cost the lender money. To protect their  investment the lender may impose  early repayment charges should the borrower redeem their mortgage within a specified  period. These charges are likely to apply during the first few  years of a  new mortgage. Schemes are available which exclude these charges.

Investments

The following investments have been popular choices for people with interest  only mortgages.

Endowment policies : These policies are run mainly by insurance companies  and friendly  societies. They are regarded as low to medium risk investments.  The fund managers invest on the stock market, in property and in fixed interest  investments. Policies can be unit linked  or with profits. Unit linked means  that a value is calculated, usually daily which directly relates to the  value of the underlying fund. Unit prices can be followed in the broadsheet  newspapers.

A 'with profits' policy entitles you to a share in the profits of the insurance  company. Issuing companies vary their annual bonus according to investment  performance and anticipated  future investment conditions. The variance in  annual bonus has historically been small which provides a degree of security  to the policyholder. A terminal bonus is also normally declared  at the end  of the term. Life assurance is included in the contract which will pay off  the mortgage in the event of death.

Unit trusts : Predominantly stock market investments where your money  is 'pooled' together with other investors in a fund which may be managed  or unmanaged (tracker). There is a  risk element to your capital as unit  prices can fall as well as rise, and a periodic review would be recommended  to ensure that the fund performance is adequate. This type of fund  is quite  flexible and tax free benefits are available if taken out within an ISA.

Pensions : If you are eligible for a personal pension, you can opt  to use part of your pension  fund to clear your mortgage. This will obviously  reduce the amount that you will have available to go towards your pension,  however you will receive full income tax relief on your  contributions. This  means that a higher rate taxpayer paying £100 per month into a pension  fund will in fact only contribute £60 per month, the balance being   paid by the inland  revenue. 

Property types

A mortgage is agreed on the basis that the property is a good security. Lenders in general do not like lending on the following properties:

Property that requires any structural work or remedial works. 

If the property requires any significant work doing to it, then please make sure your advisor is aware of it.

Freehold Flats, Studio flats, Ex local authority flats, High rise flats, Flats above commercial premises (particularly food) .

Non standard construction, ie. timber or concrete walls.

If the property you are considering falls into any of the above categories, please contact us.

Auction Properties

If you are considering buying a property at an auction. It is most important that you have a mortgage agreed before you bid for a property. On the fall of the hammer, you will be expected to pay a deposit (often 10%), with the balance paid within a short time period.

Your deposit may be lost if your mortgage does not complete within this time period.

Please read carefully the terms specified by the auction provider. 

Please discuss with one of our advisers.

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