Buy to let mortgages are designed for people who want to invest in property, with a view to renting it out to a tenants. In recent years the rise in popularity of buy to let mortgages indicates how lucrative they can be, and many people have established a property portfolio on the back of the success and availability of buy to let mortgages.
The benefits of being a landlord, and of taking out a mortgage for a buy to let property, are numerous: the money repaid from your tenants’ rent goes someway to building up equity in a property, which can be used at a later date; it can provide a supplementary income if the rental repayments are higher than the repayments on the mortgage. But, like any potential investment, there are things to be wary of when taking out a buy to let mortgage.
One of the biggest things to consider, once you have decided to take out a buy to let mortgage, is the potential to be charged money in early redemption charges. These fees usually apply to fixed rate mortgage products but can be present on any mortgage type. Early redemption charges can vary and be complex in their criteria, but they often refer to a mortgage that is repaid whilst still in the incentive introduction period (2, 3 or 5 year fixed deals for instance) or if a certain percentage is repaid early; it prevents the lender earning the interest on the mortgage loan that they imagined they would when they agreed the mortgage with the borrower.
Other times the early redemption charge can be payable is when the mortgage is paid off during the fixed or discounted term of the mortgage loan. The amount of time that the early redemption charge applies to the mortgage can vary, but often lasts until the mortgage term switches to a standard variable rate (SVR). However a number of lenders charge early redemption charges beyond the initial rate period – these are usually referred to as extended tie in periods.
In most circumstance once the initial rate is over this would be the time when it would be possible to re-mortgage the property with no financial penalty, however this may be after a 2,3,4 or 5 year term, but taking out to a buy to let mortgage with no early redemption charge can solve this problem and make remortgaging (or selling) within a shorter space of time without a financial penalty possible.
The benefit of securing a buy to let mortgage with no early redemption charges is particularly strong for people who are looking to buy a property at a price which may be lower than its true value. This usually applies to properties that are being sold at a cheaper rate in order to get a quick sale; this might apply to repossession or auction properties for example. By not having to pay an early redemption charge the true market value of the property can be achieved through re-mortgaging the property: for example, if the property is sold at a figure below its true market value, £50,000 for instance, but is worth £70,000 on the open market, there is a potential £20,000 amount of equity within the property which could lower the overall loan to value mortgage rate. This option is normally only available if the property has work done on it that warrants the substantial increase in value and there needs to be evidence of this; usually a term of six months between buying and selling or remortgaging the property is necessary in accordance with Lender criteria.
Nonetheless, there is potential to significantly increase the equity in the buy to rent property, so long as there are no early redemption charges. If the early redemption charge applies to the mortgage, then there is the potential to lose some of the future equity in the property because some of the price rise (in the example above, £20,000) would be lost in the early redemption charge, and it is not uncommon for these to be around 4% of the mortgage amount.
These buy to let mortgages without early redemption charges are best designed for those investors who want to purchase, refurbish and either remortgage the property or resell the property within a short space of time. Whilst this is a fantastic opportunity to push some equity into the property, and is perfectly legal, lenders do not want this type of mortgage arrangement to be used as an alternative to a bridging loan. Using the buy to let mortgage with no early redemption charge for this purpose too often can mean that future lenders may refuse loans and so it should be used sensibly!
For information about the best buy to let mortgage options, including buy to let mortgages without early repayment charges, and all other types of buy to let mortgages, please contact Ascot Mortgages, the UK buy to let experts.
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