Buy to Let Mortgages

2008-08-25 15:06:56

( Financial )



Income Potential of Rental Property

Managing rental property is a business in itself. Your income from this type of property comes from the rent payments that your tenants make every month.

The effort of operating rental property is not as tedious as that of a manufacturing or merchandising business. If you only have a few apartment units to let, you shouldn't need to busy yourself with its management. You can even hire an apartment manager to take care of the daily minor repairs and maintenance, like fixing a clogged drain or replacing a broken windowpane.

Thus, rental property makes a sound investment and earns better than keeping your money in a savings account or investing in riskier stocks. Depending on the area, most property values also have an increasing trend, and you can always sell the property at a good price.

As long as you have good responsible tenants, you will almost always receive the rental payments on time, and you don't have to make expensive repairs on the property.

Characteristics of Buy to Let Mortgages

Because of the increasing popularity of purchasing real property for the purpose of renting it out, the buy to let mortgage was conceptualized during the 1990s to answer to the financial needs of landlords. It was developed at almost the same period as current account mortgages.

This is a type of mortgage that is specifically for rental properties only. Lenders calculate the loanable amount and amortizations based on the earning potential of the property. As a rule of thumb, the annual rental income must be about one and a half times the annual amortization. This provides the landlord with adequate allowance to pay for other expenses related to the property, such as taxes, repairs and maintenance, and homeowner's insurance.

Benefits of Buy to Let Mortgages

As landlord, you can get tax breaks by charging operating and maintenance expenses of the property against the taxable rental income. Rental properties may also have greater appreciation potential compared to regular homes, thus increasing the landlord's equity. The enhanced equity value can then be used to secure other loans.

The Downside of Buy to Let Mortgages

No matter how well you select your tenants, they come and go. Every time a tenant vacates, you get stuck with a non-earning rental unit. Yet you need to continue paying amortizations, and this can wreak havoc on your cash flows.

And as rental properties are generally exposed to more risk from damage or loss, the interest rate of buy to let mortgages is also higher than that of a standard home mortgage.


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