The buy to let mortgages are type of investment mortgages in which the borrower lets the property for rent or lease. The rental income covers the entire mortgage payment. The only time the investors pay from their pocket is when the tenant leaves the property.
The investors enjoy profitable return in two ways. First, the rental income pays off the mortgage. Thus, the investors create home equity. Secondly, the home values may appreciate in value. Again, the investors create home equity. Using the home values appreciation, the investor sells the home property at a higher price.
The risk factors for investor are the depreciation, rental void and maintenance. There are no guarantees for home appreciation, but we can not create land. Land is a limited resource. Eventually, the land will increase in value.
When the tenant leaves or moves from the rental property, the investors repay the mortgage payment. This is more commonly known as rental voids. The mortgage lenders will insist on rental income to cover 125% of the mortgage payment to protect from rental void, but many mortgage lenders accept a 100% cover on mortgage payment.
Hopefully, the tenant will take care of the property. Since the tenants do not own the property, the tenants have the tendency to take the property for granted. Then, there is the natural wear and tear of the property.
In most cases, the mortgage lenders will ask for a larger down payment or deposit. The larger down payment will ensure the rental income to cover the entire mortgage payment. Often, the investors will be approved for eighty percent of the property value. And, the borrower needs twenty to twenty five percent mortgage down payment. In some buy to let mortgage deals, the borrower can put five, ten, or fifteen mortgage down payment.
The mortgage lenders may also insists on mortgage insurance. The insurance will protect the investors from loss of income to repay the mortgage. The loss of income comes from death, critical illnesses, or disability.
The investors pay higher interest rate on buy to let mortgage due to the risks. Even though the mortgage financing are risky, the investors can still find mortgage deals in which the investors pay less interest rate on mortgage deals.
On buy to let mortgage, the mortgage lenders may approve one or more properties. Usually, they approves maximum of five properties for buy to let mortgage. Just think all the tenants left at the same time. The investors will need to repay all the mortgage payment for all buy to let properties.
Before the mortgage lenders approve the mortgage refinancing, the mortgage lenders will look at rent potential of the property, income of the investors, outstanding loans of the investors, and attractiveness to the tenants. The income and rent must satisfy the mortgage repayments. And, the property looks good for the potential tenants. The tenants will want to live in the property.
The popular mortgage refinancing which is available to the investors are fixed rate, capped, discounted, and variable rate mortgage as well as cashback mortgage and interest only mortgage.