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The Buy-to-Let Mortgage:

A buy-to-let mortgage is a special type of mortgage introduced in 1996 and designed for property which you intend to rent out to tenants. This type of mortgage, introduced by the Association of Residential Letting Agents (ARLA) and supported by many of the leading financiers, has been extremely successful and has contributed to the rapid growth of the rental property market in the UK.

Typical 3 story Town Houses

The buy-to-let mortgage can be secured on your own home in the form of a "second charge" or, as is more likely, secured against the property you intend to let.

The buy-to-let is best viewed as a long-term investment which will provide you with an income and hopefully a capital gain over time. There's no absolute guarantee that the income from the property will cover your outgoings: letting expenses, void periods and mortgage repayments in the sort-term. Also, there's no guarantee your property will appreciate in value over the sort-term, though long-term property has always done well in this regard.

The amount of money you can borrow on a buy-to-let mortgage in linked to the value of the property and the rental income you can expect to receive. Known as the loan to value ratio (LTR) this will vary from lender to lender and the competition between them at the time, but most typically your lender may specify a maximum 85% loan to value ratio. This means you will need a deposit of at least 15% of the value of the property and ideally a rental income of between 20 and 30 percent higher than your monthly mortgage payment.

Buy-to-let mortgages can take four different forms: (1) the repayment mortgage where you pay off some of the capital amount with each mortgage payment made, and (2) an interest only mortgage where you repay interest only and the capital borrowed stays the same. Many investors go for interest only mortgages but if you do, you should plan to pay off some of the capital whenever you can because house prices can go down as well as up. (3) a fixed rate mortgage, where you opt to pay a slightly higher fixed rate of interest and (4) a variable rate mortgage where the interest rate increases or decreases with changes in the bank rate.

Like all investments, buy-to-let properties have their risks. The secret is to take a long-term view and to develop a strategy which reduces your risks to a minimum.

What can go wrong? How can I deal with this?
Bad tenants are a risk all landlords take: they can damage the property, fail to pay rent and cause neighbour problems, so that you have to evict them. No income for months can cause severe cash-flow problems if you have only one property and high borrowings. Select your tenants very carefully and do credit checks and references. Make sure your paperwork, such as application forms and agreements, is in order so that eviction is a more efficient process, though it still takes time. Consider rental & legal costs insurance. Don't over-borrow. Save money by managing yourself.
Buying in a bad location: tenants demand certain amenities such as the type of property, transport links and shops, dining out and launderettes etc. If good facilities don't exist nearby you may have longer than average void periods. Do your homework: walk the streets, ask agents about demand, read the local press ads, check for transport links, schools, employment, shops and other letting is the area. Try to let near where you live if you can - it makes managing the let yourself much easier..
The property is not in good condition. You should make sure your property is free from major defects when you buy. Poor amenities, cleanliness and decor can make your property difficult to let because you may face competition from other landlords. Have the property surveyed before you buy including a wood survey. Make sure the property is suited to the local letting market and it matches or exceeds the standards of other properties. Make sure you have sufficient money to pay for upgrading when needed.
Costs rise when you do not expect them to. Interest rate increases and unexpected repair bills such as heating boilers, roof repairs, flooding or bursts can put you under financial strain. Make sure you have adequate landlord's insurance, consider rental guarantee and legal expenses cover, cover, consider a fixed rate mortgage and keep some money in reserve for the unexpected.
You have problems letting your property quickly or refurbishment takes longer and costs more than you thought. Void periods can stretch out for weeks so you could have a period where you have no income but still need to make your mortgage payments. Hone your marketing skills by learning where and how to advertise and how to close the deal. Use a local letting agent if necessary. Always allow for these contingencies and have some money in reserve in case things go wrong.
You fall foul of the law - letting laws have increased considerably since the advent of the Housing Act 2004, so you need to be aware of the rules. It's either mug up on the rules yourself, or pay a managing agent to manage the letting for you. You should plan on doing your homework thoroughly before you venture into the business for the first time. If you do-it-yourself you can save a lot of money and it's not too onerous once you learn how, but you must put in some effort to learn at first.
We recommend this book - a very comprehensive guide to renting out property based on years of experience. It's well worth spending a few hours reading and planning before you rent out your property. Renting Out Your Property for Dummies These are LandlordZONE  and TenantVERIFY pages you should definitely read:

Information here is general only & believed to be correct, though we cannot guarantee it, nor do we accept any liability if you act or fail to act on this information. Always seek professional advice before making decisions. Investments can go down in value as well as up over  time.