Buy-to-let
Funding your investment…the points to consider
Buy-to-let mortgages have become much more competitive in recent years. Now you almost have the same choice available as you have with ordinary mortgages.
Buy to let mortgages used to be few and far between, however most lenders now offer a range of buy to let mortgages. The points to consider are pretty similar to those you make when choosing your mortgage to buy your own home.
First of all, you need to decide whether you want to end the mortgage term with a fully paid-for property or not. If you have made no arrangements to pay off the mortgage capital (either through a repayment mortgage or a separate investment vehicle) then you may have to sell the property so you can pay it off.
It also depends on what you want from the rental income throughout the mortgage term. If you need some of the rent to live on immediately then an interest-only mortgage would probably be more appropriate because, after making the interest payments, there would be some rent left over for your own pocket. If you don't need the rent for yourself, then all of it can be used towards the interest payments with the surplus being used for the repayment of the capital or, indeed, to help finance a further buy to let investment.
Remember you also need to keep some cash spare to cover void periods and repairs to the property. And, don't forget tenants who fail to pay their rent too - not only does it mean you're subsidising their housing when they don't pay up but it's an expensive business to have them evicted from your property.
So the advantage of a repayment mortgage is that the property will be all yours when you come to end of the mortgage term. The risk is that you will have less money to play with should you need some of the rent for other purposes and it's also not as tax-efficient.
The advantage of an interest-only mortgage is that your monthly mortgage payments will be lower so more of the rental income should be available to you - and you don't need to worry about the capital repayment until the end of the term. The risk is that, if you haven't made other arrangements, you'll have to sell the property eventually to pay off the original loan.
However, it's worth considering the following: Your mortgage interest payments can be deducted from rental income for tax purposes. However, if you have a repayment mortgage, any capital payments can't be offset. This means you'll have to pay tax on a larger part of your income. That's why it can make a lot of sense to get an interest-only mortgage instead, where the total mortgage payment can offset income.
Bear in mind that you can get flexible buy-to-let mortgages which enable you to enjoy an element of both the repayment and interest only mortgages. Access to cash is immediate in an emergency and, if you don't need to get at it, any surplus can be used to repay the capital in the meantime. These are, however, slightly more expensive and you need to be very disciplined about how you manage your account.
Your property may be repossessed if you do not keep up repayments on your mortgage.
For mortgage advice you can choose how we are paid: pay a fee, usually 0.5% of the loan amount, or we can accept commission from the lender.
Levels and bases of, and reliefs from, taxation are subject to change.
|
