The preferred choice of many looking to increase their monetary value over time, recent years have seen a growing boom within the buy-to-let market. These mortgage products give opportunities to property investors who want to secure properties to be rented out for income. You must completely understand the various types of products available before looking at securing this kind of mortgage loan. Let us explore the various options below:
Fixed-rate mortgages
Due to their stability and predictability, a fixed-rate product is often a loan type that is commonly used and wanted by BTL investors. Financing via this type of mortgage means that your given interest rate remains unchanged for a fixed period of time; normally, this tends to be between two and five years, which will be agreed upon with your lender or bank. With fixed-rate products, the key benefit that stands out is that they protect you from hazardous and expensive interest rate fluctuations, thus allowing you to budget your finances more accordingly, knowing exactly what you have to play with after your payments. Please be considerate that fixed-rate mortgages do normally have a higher interest rate when compared to other options.
Tracker mortgages
Sometimes referred to as variable-rate mortgages, a tracker mortgage is directly linked to the specific base rate set by the Bank of England. The rate on these mortgages fluctuates in line with amendments to the base rate itself. To explain: if the base rate increases by 0.25%, your mortgage rate will also increase by the same percentage figure. Likewise, if the base rate decreases by, say, 0.25%, then your repayment rate will decrease as well to reflect that change in the base rate. Tracker mortgages can offer attractive rates initially, but they carry an element of uncertainty due to potential interest rate hikes.
Discounted rate mortgages
Discounted rate mortgages provide borrowers with a reduction on the lender’s standard variable rate (SVR) for a specific period, typically between two and three years. These mortgages offer a discount, often expressed as a percentage below the SVR. While discounted rates may seem appealing, it’s important to consider the lender’s SVR as well, as it can vary significantly. This means that while the discounted rate may be low, the SVR itself might be higher compared to other lenders, impacting the overall cost.
Offset mortgages
An offset product allows you, as the borrower, to link both or just one of your savings and current accounts to your mortgage; this then ‘offsets’ the interest charged on the mortgage balance. If you happen to have a mortgage with a balance to repay of £200,000, you hold savings of £50,000, which you link to it; this means you will only pay interest on the net balance (in this example, that would be an amount of £150,000). Offset mortgages can be a tax-efficient option, as the interest earned on your savings is not subject to tax. However, they often come with higher interest rates and fees.
Interest-only mortgages
With this type of loan, borrowers are only asked to pay interest on the loan each month, with the principal amount remaining unchanged, i.e., the outstanding mortgage balance itself. When your mortgage term has ended, you must, at that time, repay the entire loan amount in full. As your payment is significantly lower each month, this can prove very attractive, particularly for investors or those who do not want to immediately compromise their cash flows. Be sure that you have a plan in mind for clearing the balance at the end of the loan term.
Assess all your financial circumstances, risk tolerance, and investment objectives before even considering if this is the right kind of loan. Each of the aforementioned products has its own set of advantages and disadvantages. A specialist whole-of-market broker like UK Property Finance can provide invaluable guidance tailored to your specific needs.
To sum up, there are many types of buy-to-let mortgages open to you, and it is crucial that, prior to getting into the property investment market, you understand these and what your actual options are. Our advice at UK Property Finance is to carefully consider your options and seek advice when needed. With the right guidance, there is no reason why this venture should not be the foundation of your future success and growth.