Introducing the ultimate guide to understanding the differences between Buy to Let and residential mortgages. Whether you are a first-time homebuyer or an experienced landlord, this guide will help you know what sets these two types of mortgages apart. We’ll explain what factors to consider when choosing between them, how each type works, and which suits your situation. By the end of this guide, you can confidently decide which option best suits your needs. So let’s get started!
Buy to Let Mortgage vs Residential Mortgage
Buy to Let Mortgage:
For those unfamiliar with the term “buy to let mortgage”, it is a specific type of loan designed for landlords who want to purchase a residential property (or multiple properties) to rent them out. This type of mortgage usually requires a larger deposit than residential mortgages. It generally has higher interest rates but can also provide an opportunity to earn additional income through rental payments. It’s essential to understand the differences between these two types of mortgages when determining which one is right for you.
Who It’s Aimed at:
Buy To Let mortgage is aimed at those looking to invest in residential property and rent it out, either on single or multiple units.
Types of Properties Eligible:
Generally, Buy To Let mortgages can be used to purchase any residential property such as flats and houses.
Deposit and Interest Rates:
A Buy To Let mortgage usually requires a larger deposit than a residential mortgage, and interest rates can be higher.
Residential Mortgages:
On the other hand, residential mortgages are designed for people who want to purchase their own home or investment property to live in it themselves or at least not rent it out. These mortgages typically require smaller deposits and have lower interest rates than Buy To Let mortgages.
Who It’s Aimed at:
Residential mortgages are aimed at those wanting to purchase a home for their use rather than as an investment.
Types of Properties Eligible:
Generally, residential mortgages can purchase any residential property, such as flats and houses.
Deposit and Interest Rates:
Residential mortgages usually require smaller deposits than Buy To Let mortgages, and the interest rates are generally lower.
Differences Between a Buy to Let Mortgage and A Residential Mortgage
Certain factors must be considered when deciding between the two types of mortgages. Here are some of the primary differences between a Buy To Let mortgage and a residential mortgage:
Tax Implications: Buy To Let mortgages are treated differently for tax purposes, while residential mortgages may be eligible for tax relief.
Deposit and Interest Rates: Buy To Let mortgages usually require more significant deposits and have higher interest rates than residential mortgages.
Insurance Requirements: While home and landlord insurance sound similar, they’re classed differently because landlords receive an income through their rental property. While both types of insurance will protect you if damage to the building, your home insurance may not cover you if the property is let out to tenants.
Rental Income: With a Buy To Let mortgage, landlords can earn rental income from their property. This is not the case with residential mortgages.
Pros and Cons of Each Type of Mortgage
When deciding between a Buy To Let mortgage and a residential mortgage, it’s essential to understand the pros and cons of each.
Buy to let mortgage pros:
- Generate an income and cover mortgage repayments: You can protect your monthly repayments with the rent and generate a considerable income from tenant payments. This arrangement may be profitable depending on how much rent is charged and the cost of loan instalments.
- Offset the costs against tax: You can usually claim back some of the costs of running your rental property on your self-assessment tax return.
- Long-term investment and gain: Property investment is almost always a sound long-term decision. Over time, your property’s value could skyrocket; however, there are no guarantees, and it may also decrease in worth.
Buy to let mortgage cons:
- Deposit: Generally requires a larger deposit than residential mortgages.
- Damage to the property: You must cover any damage or repairs.
- The costs of running an empty property: Sometimes, your property might be vacant. You’ll still have to pay council tax bills, mortgage repayments and other maintenance costs without the rental income to fund them.
- Stamp Duty surcharge: Landlords must pay a 3% stamp duty surcharge.
Buying a property is likely the most significant investment (with ample rewards) you’ll make in your lifetime.
Residential mortgage pros:
- Deposit: Generally requires smaller deposits than Buy To Let mortgages.
- Interest rates: This tends to be lower than Buy To Let mortgages
- Investing And Building Equity: Instead of paying your monthly rent to a landlord or corporation, you can pay it to a lending institution making your home a long-term piggy bank.
Residential mortgage cons:
- Income potential: Can only earn income through having a buy to let mortgage.
- Additional monthly costs: As a mortgagee, your monthly expenditure increases due to various recommended insurance policies.
- Maintenance & Repair: As a tenant, you can rely on the landlord to carry out all repairs and maintenance, but as an owner, the onus is on you.
Who Should Choose a Buy to Let Mortgage?
If you’re looking to invest in residential property and rent it out, a Buy To Let mortgage may be the right choice. However, it’s essential to understand that these mortgages require more significant deposits, higher interest rates and additional insurance coverage.
Who should choose a residential mortgage?
If you want to purchase a property for your personal use, then a residential mortgage may be the right choice. Generally, these mortgages require smaller deposits and offer lower interest rates than Buy To Let mortgages. They also don’t need additional insurance coverage.
Summary & Conclusion
When deciding between a Buy To Let mortgage and a residential mortgage, it’s essential to consider the pros and cons of each. Buy To Let mortgages generally require more extensive deposits, higher interest rates and additional insurance coverage. However, they can potentially provide an additional income stream through rental payments. On the other hand, residential mortgages generally require smaller deposits and offer lower interest rates. They also don’t require additional insurance coverage. Ultimately, the decision will depend on your individual needs and goals.
FAQs – Common Questions About Buy to Let Mortgage vs Residential Mortgage
Q1: What are the tax implications of each type of mortgage?
Answer: Buy To Let mortgages are treated differently for tax purposes, while residential mortgages may be eligible for tax relief.
Q2: What is the difference between a Buy To Let mortgage and a Residential mortgage regarding repayment periods?
Answer: With a buy-to-let mortgage, you’ll only usually pay the interest each month, not the total capital amount
Q3: How does my credit score affect which type of loan I choose?
Answer: Your credit score will affect the interest rate lenders offer, regardless of which type of loan you choose. A higher credit score may lead to a better approval rate.
Q4: What other costs should I consider when choosing between these two types of mortgages?
Answer: You should consider broker fees, lender’s fees, conveyancing see, and insurance costs when choosing between a Buy To Let mortgage or a residential mortgage. Consider the potential returns on investment of each option.
Q5: What are the different types of Buy To Let mortgages available?
Answer: There are several types of Buy To Let mortgages, including fixed, variable, and interest-only mortgages.
Q6: How do I compare interest rates when looking at both types of loans?
Answer: You can compare interest rates using a mortgage comparison service or speaking to multiple lenders. It’s essential to consider the other costs of the loan in addition to the interest rate when making your decision.
Q7: What other information should I consider when making my decision?
Answer: You should consider your needs, goals and financial situation when deciding between a Buy To Let mortgage or a residential mortgage. It’s important to talk to a lender or financial professional to ensure you understand your decision’s full implications.
**Your home is at risk if you do not keep up repayments on a mortgage.**
