Five Differences Between Buy to Let & Standard Mortgages

by Kyle Taylor on November 4, 2013

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Dream Home

Homes purchased for residency and homes purchased to let are each investment properties, in their own way. As there are differences in the reason for buying a personal residence as opposed to an investment property, so there are differences in the mortgage regulations that govern these purchases. These are the main points to consider when shopping for financing.

1. Lenders calculate standard mortgages based on a multiple of the buyer’s annual income. Buy to let mortgages such as those from Clydesdale Bank allow lenders to consider the potential lease amount as income when assessing the borrower’s ability to afford the mortgage.

2. Due to the perceived risk inherent in letting properties, lenders charge higher interest rates and fees when arranging buy to let mortgages. Beware of attempting to arrange a standard mortgage if you intend to let the residence. There are financial penalties attached to such a practise, including the risk of loan revocation, an order of immediate redemption of the outstanding mortgage balance, and having your insurance invalidated due to an incorrect mortgage.

If you convert a residential home into a lease at some point in the future, such as when you intend to purchase a new home, the loan will usually remain under FSA regulation when you apply for revert-to permission.

3. There are different tax consequences for each type of purchase. Homes that are occupied buy the mortgage holder are subject to the standard taxes for home owners, with the typical deductions for interest and maintenance. Buy to let purchasers are subject to income tax on rent for property valued above £125,000, and they’re subject to capital gains tax upon selling. However, interest and leasing fees are deductible. Spend some time on the HMRC’s website and familiarise yourself with tax laws before doing anything.

4. The regulations state that buy to let properties cannot be occupied by either the mortgage holder or a member to their family. Any lease property found to be, at minimum, 40 percent occupied by the mortgage holder or a family member will revert to a standard lease, with the traditional criteria used in assessment of financial fitness.

5. There’s a difference of approximately ten percent loan to value ratio in arranging a buy to let mortgage over a standard mortgage. Generally a buy to let will be financed at a ratio of 80 percent to 20 percent, while a standard mortgage will be valued at 90 percent to 20 percent ratio. This amount may vary from lender to lender.

Whichever type of property you’re in the market for, a professional mortgage broker can help you sort out the details. A knowledgeable lender knows the regulations that govern each type of financing and can advise you of the proper steps to take to ensure that your mortgage is in compliance.

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