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Tuesday 22 November 2022

What is a buy-to-let mortgage?

Buy-to-let mortgages are specifically for those who are purchasing a property as an investment, with the intention to rent out the property. Therefore, the owner cannot reside in the home under any circumstances.

This article will help you establish the difference between a fixed-rate mortgage and a variable-rate mortgage. It is good to keep in mind the price of your monthly mortgage payments will depend on several factors including the amount you plan to borrow, the rental income you expect to generate from the property and the type of mortgage you choose for your buy-to-let property.

Fixed-rate mortgages

Fixed-rate mortgages are usually offered to investors on an interest-only basis. 2 and 5-year fixed-term mortgages are the most popular type of buy-to-let mortgages.

The interest rates on fixed mortgages for BTL properties will remain the same rate throughout your agreement, this could be between 2- 10 years. Therefore, you will not need to worry about your interest rate changing because your monthly payments will be fixed.

Although, with fixed-rate mortgages, if you decide to terminate the agreement before the fixed term ends, you are likely to be charged a penalty which is referred to as an early repayment charge (ERC).

Zoopla recently reported the average cost for a fixed-rate mortgage is decreasing despite the recent increase in interest rates, with high-street lenders including NatWest reducing their deals by up to 0.75%.

The benefits of choosing a fixed-rate mortgage include:

  • Protection from your interest rates rising – as your interest rate is fixed, your monthly payments will consistently be the same each month until your fixed-term ends which protects you if interest rates increase which gives you peace of mind.
  • You can choose how long you would like your fixed-term mortgage; this can be between 2-10 years. Long-term fixed rates can provide security, whereas short-term fixed rates may have lower interest rates.

Variable-rate mortgages

With a variable-rate mortgage, the interest rate will frequently adjust to align with the Bank of England’s base rate, meaning your repayments will fluctuate throughout the loan term. For example, in November 2022, interest rates increased therefore the average cost of variable-rate mortgages also increased.

Standard variable rates are set by mortgage lenders therefore investors should compare deals from mortgage lenders to find the cheapest option.  

Investors are likely to have a standard variable rate (SVR) mortgage after having a fixed-rate or discounted mortgage. Usually, SVR mortgages tend to have higher interest rates compared to other mortgage options.

The benefit of choosing a variable-rate mortgage includes:

  • Flexibility – Choosing a variable-rate mortgage provides flexibility as you are not on a fixed term, and you are not restricted to switching mortgage lenders to find a deal suitable for you without occurring high exit fees.


Mortgages for off-plan property

Off-plan property is a popular choice for investors, especially those beginning their property journey or those looking to expand their portfolio.

Investing in off-plan property means purchasing the property before it has been built, by looking at the development specification, floorplans, and CGIs. When purchasing an off-plan property you are likely to receive a discount/incentive due to purchasing the property before it has been built. Your property may also increase in value once completed.

Usually, lenders for off-plan buy-to-let mortgages will arrange a mortgage valuation and offer a mortgage on the property once it has been completed as the value of the property may change, which could affect your mortgage and result in you losing your deposit.

When getting a mortgage for off-plan properties, you will need to meet certain criteria to be approved for a buy-to-let mortgage. The amount of your loan will depend on your current income and your personal eligibility for a mortgage.

Lenders will usually suggest getting a buy-to-let mortgage if you are looking to start or expand your buy-to-let property portfolio. There are further mortgage options available for a buy-to-let property, which you can discuss with your chosen lender.

At ERE Property, we have off-plan buy-to-let investment opportunities in UK hotspot areas which are mortgageable. If you have any further questions or are looking to invest in UK buy-to-let property, get in touch and one of our industry experts will be happy to help you get started on your investment journey!


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