The buy-to-let market is booming and, as with whenever there is such a need and profits can be made, in meeting the requirements of those looking to purchase a buy-to-let property, banks have created niche buy-to-let home loans. However, buy-to-let home loans do differ from the more traditional forms of home loans in a number of different ways.
The first thing you need to understand before you apply for a buy-to-let home loan is that it is likely the bank lending you the money will look upon your new venture as a business venture, rather than a straightforward home loan. Consequently, while the amount you earn in income may have a significant role to play in determining whether or not the bank will lend you the home loan mortgage, this will not be the only factor in the equation. In addition to the income you earn, banks lending on a buy-to-let basis will also consider any projected income you may receive from the rental of the buy-to-let property. Consequently, when looking to purchase a buy-to-let property it is always a good idea to discuss your needs with a real estate agent, as you may need projected income calculations from the real estate agent to be submitted with the application for a buy-to-let home loan.
The second thing you need to remember is that, because this is seen more as small business venture by the bank than a personal borrowing, the terms of the lending are likely to be more stringent. For example, whereas you may be able to apply for a home endowment or repayment mortgage over a period of 20 to 25 years, with a buy-to-let home loan the repayment period is likely going to be much shorter, say 10 to 15 years. In addition to a shorter repayment period, you should also be looking to pay a slightly higher, commercial, rate of interest on the buy-to-let home loan. Finally, you may well be asked to make a higher down-payment with a buy-to-let home loan.
The third thing you need to consider with any buy-to-let home loan is your tax position, Here you will need to discuss your plans carefully with your tax advisor and financial planner, as it is likely that rental you earn from the property will be taxable in some form – probably as income tax. Depending on your current circumstances, this may not make the venture very attractive.
With the rate of increase seen in property prices over the last two decades, and with more and more young people being unable to afford to jump on the property ladder, the buy-to-let market as seen a minimum boom. However, buy-to-let properties should be carefully considered in-line with all of your other investments and you should always keep in mind that the value of your buy-to-let property may decline. It is therefore essential when looking to purchase a buy-to-let property that you ensure you will have a steady stream of rental income over the duration of the home loan repayment to ensure that you are not stuck with two properties, neither of which is earning you any income and only one of which you are living in.