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Understanding Buy to Let

Buy to Let is a common phrase in the mortgage industry in the UK.  It is an investment that a person in the UK begins in order to get rental income.  First the person is going to buy a residential property.  This same person is not buying it to live in, but to let or rent to another individual. 

Buy to Let has been extremely popular in the UK for many years.  However there are situations that are turning this mortgage type into a subprime situation.  Many of the lenders have been encouraging amateur homeowners to get a Buy to Let mortgage as an investment.  This means there is now a surplus of homes that need to be rented in the property market that have Buy to Let mortgages.

To understand Buy to Let mortgages the risks and benefits should be taken into account.  There are several benefits including making more monthly income that will be stable from a renter.  The housing prices that have been going up will encourage the profits, which make it a valuable investment to enter into.  However, there are also risks.  The main risk is that if you can’t find someone to rent the property you are losing on the investment.  Take into consideration the Buy to Let mortgage.  It must be paid either buy the owner of the property or buy having a renter in the property that covers the mortgage cost, plus makes a profit.  So if you can’t find a renter to let the property too for an entire year you still have to pay the mortgage.  The difference of course is that it comes out of your pocket and if you don’t have the monetary funds to cover the mortgage you are now in financial troubles.

It is also important to understand the type of yield you can make on a Buy to Let property.  By yield we mean the profit you can make and how many are actually making that profit.  A survey was completed to find out how many of the Buy to Let property owners were actually successful in the last few years.  The numbers came from the BDRC for Alliance and Leicester.  It seems there are 71% of the Buy to Let owners making a profit on their investment.  This leaves 29% that have either come out even or had a substantial loss. 

These issues must be understood if you are going to enter into a Buy to Let mortgage and investment.  A failure to understand the risks is where many come out with a loss.  There are of course other things to consider such as the area you have the Buy to Let in.  The area makes a huge difference as to whether there are renters who can afford the rent you need for a profit and whether you will be overall successful. 

Buy to Let Mortgages

We have been talking about Buy to Let and mortgages, but now we will get into a more detailed look specifically towards the Buy to Let mortgages.  First the Buy to Let mortgage has been around since the nineties.  They have been designed to help investors get a loan on a property they intend on renting or letting to residents.  The mortgage offers the monetary means for the property to be purchased, so in that respect it is like any other mortgage.  The amount of the Buy to Let is usually around 75 percent of the loan to value in the property they are buying, which means the investor needed to have a deposit to complete the sale.  The home is then let to the private sector. 

There are several approaches one can take in obtaining a Buy to Let depending on the lender you choose.  I mentioned the loan to value, but there is another consideration for a Buy to Let property.  The lenders will look at the rent you can obtain on the property.  In other words they will look at the area and complete comparisons for the rent that is being paid.  The lender will find out if the rent in the area is 900 pounds for example.  If the rents are going for around 900 pounds then the home can be rented for that much.  For the person to make a profit on the rent they need to have a mortgage that is lowering than 900 pounds are they would be breaking even.  Most of the time the rent is going to include other incidentals like the cost of utilities or perhaps the insurance the property needs to carry in order to have renters.  So the lender is going to base the amount they will mortgage on the rent that can be obtained.  Usually the annual rental income has to be 120% to 150% above the loan.  This would cover the costs of the property maintenance and void periods where there may not be a renter.

There are some lenders that base the Buy to Let mortgage on the salaries of the individual.  In this case the lender offers a three times’ salary multiple and half the rental income for the mortgage.  Still some lenders are going to look directly at your financial situation.  DO you have other mortgages?  Can your salary support the additional mortgage?  Based on the answers to these questions the lender will decide to award or not award the Buy to Let mortgage.  There are also deduction rules.  The deduction rule states that they can lend up to 3.5 times you income minus the representative figure for the annual payment of the mortgage with a preset interest rate. 

For a Buy to Let mortgage you are usually going to see an interest rate that is a little higher than the average and the fees for obtaining the interest rate are going to be a little higher than your normal mortgage.  The reason for this is the risk you pose to the Buy to Let mortgage in that the renters are not always going to be guaranteed.


Currently many think the Buy to Let mortgage is what is wrong in the UK society at the moment.  It seems that the idea of how do I get money without having to work or how do I get someone else to do the work, is considered to be a problem.  The idea that someone else should have to work harder or that there is an easy way seems to be the actual issue.  Analysts and others are thinking that the thought of work smarter not harder is why the economy is in the position it is in.  Buy to Let owners who make the investments work for them can actually stop their employment in other industries because they are making enough in the rents and profits to cover the entire mortgage spread that they have and enough to pay their own bills.  They also make large profits from the sales of their investment properties.  This entire situation sees a divided line between the classes in UK society like it was back in the Victorian age where there are those working to support others and themselves while the others don’t work at all. 

Overall Buy to Let is a real estate investment.  With banking knowledge and the drive it can be very successful.  The success however, drives up the prices in the UK housing market and makes it difficult for first time buyers or others.  In other words the ladder you need to climb to actually buy a home yourself is harder to get up and this causes major issues.

Furthermore the short hold needs to be looked at.  A thing called assured short hold tenancy has been reformed in that the agreement of how many months a tenant will be in the property changed.  The landlord needed to have an agreement for the tenant to sign so that the landlord would be able to count on that income.  In other words an agreement must be signed between the landlord and the tenant stating how long the renter will be in the home.  If the agreement is broken the landlord would then have a course of action for getting the money they are owed.  In turn the tenant would be assured that the rental agreement amount would not change for as long as the agreement held.  So if the agreement was for a year then the tenant would pay the same for that year no matter what may change in the landlord’s life.

Overall the Buy to Let mortgage and policies have been very successful for 71% of the UK residents and will continue to be successful in certain areas; however the housing market is going to suffer because it makes it harder for some to actually get their own home and the housing prices have been rising.  The effects need to change especially with the current market situation in that the mortgages have been harder to obtain with the subprime issues.


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