What are the different types of buy-to-let mortgages?
There are a few different types of buy-to-let mortgages available to landlords, developers and property investors, and each type has its advantages and disadvantages. In general, buy-to-let mortgages are a special type of home loan designed for people who want to invest in property with the sole intention of renting it out, rather than living in it themselves.
However, the type of buy-to-let mortgage you choose will depend on what you are looking to get out of your investment, what you can afford and, sometimes, your level of experience in the buy-to-let market. To help you make the right choice, My Mortgage Pro has created the following guide aimed at answering the question: what are the different types of buy-to-let mortgages?
How is a buy-to-let mortgage different?
There are some key differences between buy-to-let and standard residential mortgages that you need to bear in mind if you are thinking of buying a property for rental purposes. Mortgage providers tend to see buy-to-let mortgages as riskier than residential mortgages because unless the property in question is tenanted all the time, landlords can often struggle to cover rent payments when they lie empty.
Because of this, buy-to-let mortgage fees and interest rates tend to be higher than standard ones and you will also need a bigger deposit to obtain one. Most buy-to-let mortgages are also interest-only, meaning your monthly repayments will only pay off the interest on the amount you have borrowed. You will pay off the capital in full once the mortgage term has come to an end.
If you sell your property for more than you paid for it at the end of your mortgage, that won’t be a problem, but if it has fallen in value, you’ll need to make up the shortfall. In terms of the different types of buy-to-let mortgages available, there are several to choose from, which is why it’s important to get some advice and support from a mortgage broker with experience in the buy-to-let market, to ensure you make the right choice.
What are the different types of buy-to-let mortgage?
There are several different types of buy-to-let mortgages available, each with its pros and cons…
Fixed rate buy-to-let mortgages
A fixed-rate buy-to-let mortgage guarantees the rate of interest you will pay on the mortgage for a set period, which is usually between two and five years. Once the fixed-rate period is over, your mortgage will roll over onto the lender’s standard variable rate, which will usually be more expensive than the rate your mortgage was fixed at initially.
Also, because the rate is fixed on this type of mortgage, you won’t benefit from any falls in the interest rate, should they occur during the fixed-rate period.
Variable rate buy-to-let mortgages
Variable-rate mortgages tend to be the most expensive type of buy-to-let mortgage in the long run. The rate you pay is based on your lender’s standard variable rate and can go up or down, depending on what the Bank of England does with its own Base Rate of Interest.
They are usually the type of mortgage you default to once your fixed-rate period expires. With most variable-rate mortgages, you are free to switch to another deal without incurring any exit fees.
Buy-to-let tracker mortgages
A buy-to-let tracker mortgage also has a variable rate, that is set at a small percentage above the Bank of England’s Base Rate of Interest.
It means your monthly payments could go up or down – if the Bank of England increases the Base Rate, your monthly repayments will be higher. On the other hand, if the Base Rate goes down, so will your repayments.
Discounted variable rate buy-to-let mortgages
This type of buy-to-let mortgage sees its interest rate set at a fixed percentage below your lender’s Standard Variable Rate. However, it will move in line with the SVR, so like a tracker, if the rate goes up, so will your monthly repayments, but if it goes down, so will your bills.
The discount rate period is usually for a fixed amount of time – again, anything from two to five years – and once it expires, you will automatically default onto the lender’s standard variable rate.
Contact us for more information about Buy-to-Let Mortgages
My Mortgage Pro is a professional mortgage information service. While we don’t give advice, we aim to provide you with simple, jargon-free, no-nonsense information about buy-to-let mortgages to help you make the right choice. We can also connect you with a specially selected panel of leading mortgage advisers, who are authorised and regulated by the Financial Conduct Authority, who will provide advice tailored to your specific circumstances and help you find the right buy-to-let mortgage, fast.
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