Types of Buy to Let Mortgage
There are many types of Buy to Let mortgage available and it can often be confusing to know which one is the most suitable for you. Many Buy to Let mortgages are arranged on an interest only basis, which in the main is done to keep monthly costs to a minimum and to allow ongoing costs to be offset against rental income. The alternative view is to use the rental income to pay for the property in full over time and own it outright, which requires the Buy to Let mortgage to be taken on a repayment basis. In addition, you need to decide whether a fixed, tracker or discount rate is the most appropriate for your circumstances. The basics are outlined below but we suggest you speak to one of our Buy to Let experts at no obligation for more information.
A repayment mortgage (also known as capital and interest) pays both the interest charged each month and part of the capital borrowed. In the earlier years the majority of your monthly repayment is made up of interest, however towards the end of your mortgage term the situation is reversed with the majority of your monthly payment reducing the amount borrowed. No other repayment vehicle is needed with a repayment mortgage provided you make all the payments when they fall due. A repayment mortgage is therefore simple, straightforward and easy to understand. It will ensure that your Buy to Let property is fully paid for by the end of the term so you are free to sell and use the lump sum in retirement. It also avoids the risk of fluctuations in property values which although unlikely could fall and become insufficient to clear the mortgage at the end of the term.
Interest Only Mortgage
With an interest only mortgage, as the name suggests, you are only paying interest each month. Therefore, although the payments will be lower, the amount you borrow will still be outstanding at the end of the mortgage term and you`ll therefore need to make alternative arrangements to pay the balance off in full. Each lender has different views on what is deemed a satisfactory repayment vehicle for a residential mortgage but for a Buy to Let mortgage they are all fairly happy to accept the sale of the property being mortgaged as the method of repayment. Remember though that property prices can fall as well as rise so you are not guaranteed to be able to repay the mortgage in full from the sale of the property.
Standard Variable Rate (SVR) Mortgage
Each mortgage provider has a Standard Variable Rate (SVR), which will vary from lender to lender. Your payments on this type of mortgage will go up or down in line with changes to your lenders SVR. Lenders will often change their SVR in line with changes to Bank of England Base Rate, but not necessarily at the same time or by the same amount. Lenders may also vary their SVR even if there has been no change to the Bank of England Base Rate. Most borrowers are transferred to the lender SVR once their initial incentive rate comes to an end. SVR mortgages are simple to understand and often have no early repayment charges if you switch to another lender, although rates can often be slightly higher than other rates available and the unpredictability of interest rate movements may make it harder to budget.
Fixed Rate Mortgage
A fixed rate mortgage give you the security of knowing what your monthly payments will be for a given period. With a fixed rate mortgage you pay the same rate of interest for a set period of time, typically 2, 3 or 5 years. Your payments will not change during this period, even if there are changes to the Bank of England Base Rate or the Lender Standard Variable Rate. This makes budgeting much easier as you know exactly how much you are paying each month. In return for offering you a fixed rate most lenders will charge you a booking fee or arrangement fee to set it up. Early repayment charges may also apply if you redeem your mortgage within the fixed rate period. At the end of the fixed rate period, most mortgages revert to the lender standard variable rate, which may be higher or lower than the rate you have been paying.
Tracker Rate Mortgage
With a tracker rate mortgage your payments change when interest rates fall or rise. Tracker rate mortgages are usually linked to the Bank of England base rate, which means they will change in line with changes to the base rate, although they can also be linked to other rates such as the lender standard variable rate too. A tracker rate mortgage usually offers an initial incentive period, typically 2 or 3 years, where the interest rate payable may be set at a small percentage above the rate being tracked. This initial rate is often lower than a fixed rate over the same period but of course may increase or decrease making it harder to budget. At the end of the incentive period the rate payable will continue to track the rate it was originally linked to but usually at a higher margin above, which means the monthly payments can increase quite substantially. However some tracker rate mortgages remain at the same percentage above the rate being tracked for the term of the mortgage so no such increase occurs. Unlike a Standard Variable Rate mortgage you will have the certainty of knowing that your rate will always move in line with the rate being tracked. Booking fees and Early Repayment Charges for the initial incentive period may also apply.
Capped Rate Mortgage
A capped rate mortgage offers you the security of knowing that your monthly payments will not rise above a certain level during the capped rate period. The rate payable can increase and decrease in a similar way to variable rates, but you have an element of security like you would with a fixed rate mortgage because you know there is a maximum level your payments could be within the stated period. This can make budgeting easier and at the same time you can still benefit should interest rates fall. In essence a capped rate mortgage gives you the best of both worlds, although they tend to have slightly higher interest rate than an equivalent variable rate or fixed rate mortgage over the same period. Early repayment charges may apply for the duration of the capped rate period and generally an arrangement or booking fee may be payable. After the initial capped rate period ends, you will normally have to pay the lender standard variable rate so there may be an change in your monthly payments.
Discounted Variable Rate Mortgage
A discounted variable rate mortgage is similar to the standard variable rate product but allows you to benefit from a discount on the lenders standard variable rate for an initial period making your payments cheaper. If the standard variable rate (SVR) increases or decreases, so does the discounted rate which you pay. For example, if the lender SVR is 3.99% and they offer a discount of 1.49% for two years, you will start off by paying 2.5%. If the SVR increases to 4.99%, you will pay 3.5%. Generally speaking, the shorter the discounted period the larger the discount available. Like any variable rate mortgage there is an element of uncertainty as payments can change making budgeting harder. The lender may also increase their rates at any time independently to any changes to the Bank of England base rate. Early repayment charges are likely to apply for at least the term of the discount period and there is generally an arrangement or booking fee payable. After the discount period ends, you will normally revert to the lenders standard variable rate which may lead to an increase in your monthly mortgage payments.
Buy to Let mortgages explained
For more information speak to one of our advisers today on 0845 219 0427 or 0121 308 9114. Alternatively complete the short online enquiry form to request a call back.
We can often arrange face-to-face appointments in Mere Green, Four Oaks, Sutton Coldfield, Lichfield, Tamworth, Burton, Birmingham, Walsall, West Bromwich and many other surrounding areas of Staffordshire and the West Midlands. Alternatively we can make arrangemtns for you to visit our offices to discuss your requirements in more detail.
Caboodle Financial Services Ltd
240B Lichfield Road
Sutton Coldfield B74 2UD
Telephone: 0121 308 9114