Borrowing to invest in a rental property

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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.

Alex Cheema does not provide advice on mortgages or equity release. This service is by referral only.

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Whether you are looking at buying-to-let, where you are borrowing to invest in a rental property, or letting-to-Buy, if you want to turn your current home into a house that generates income, the Buy-to-let mortgage market is a specialised one.

Lenders generally view buy-to-let mortgages as higher risk than residential mortgages because they know that many landlords rely on rental income to make the mortgage repayments and if the property is vacant for a period, there is no income.  Because of this perceived risk, interest rates tend to be higher than residential mortgages, and the lender will usually demand a higher deposit.  Stamp duty charges are also 3% higher than residential mortgages.

Typically in the current market, you will struggle to borrow more than 75% of the property value, and any lender will look for rental income that covers around 125% – 145% of the mortgage repayments.

However, despite the risks and costs associated with buying-to-let, the main benefit is for its investment potential – both capital growth on the value of the property and the income it generates in rent.  The buy-to-let market that exists today has a huge part to play as first time buyers are getting older and younger people are renting.

When borrowing to invest in a rental property it is important to ensure you have a clear understanding of the process, benefits, risks and associated costs.  By seeking whole of market mortgage advice, you will get access to all the non-directly brokered mortgages available across the market place, i.e. not limited to a select few lenders, so you are more likely to get a better rate.