In a recent YouTube video, I talk through buy to let mortgages and give my general advice on rising interest rates. If you're thinking about buying a house, watch the video (above) to the end. This will give you a clearer idea about what mortgage is best suited for you.
In this article, I will summarise the main things to consider when you are looking to get a buy to let mortgage. If you find this article helpful, please consider sharing it with your friends and family on social media.
1. Interest rates
Interest rates have recently gone up. The average interest rate on a buy to let mortgage is about 4% for a two year fixed rate product. You may be offered a mortgage that is higher or lower than the average. The rate you will get will depend on a number of factors including which lenders are willing to lend to you.
Consult a whole of market mortgage broker that can find the best mortgage product for your needs. Even if you are turned down by high street banks, there are specialist lenders that may be able to lend to you. If you have a good cash flowing property you are looking to buy, there is normally a solution out there.
2. To fix or not to fix?
I have recently refinanced a bunch of my houses. I used a lender called The Mortgage Lender and I have fixed my interest rates for 5 years. I can see that interest rates are going up as central banks battle inflation, so while I normally fix rates for 2 years I have fixed them for 5 years this time. This protects me against any big interest rate increases that might happen in the medium term.
Given current economic conditions, it makes sense to me to fix interest rates. Each investor has a unique risk tolerance and should make their own minds up on this topic. Speak to a financial professional and make a decision that is right for you and your investments.
3. Interest only vs repayment
I choose to have interest only mortgages. This allows me to use the money I save to pay for another deposit and buy another property. This creates a snowball effect that allows me to use the bank’s money to buy more and more property. Each of those properties produce cash flow which can be used to buy more properties. To me, this is better than paying down a property as it allows me to build my portfolio.
Money becomes worth less over time. You can buy less stuff with £1 today than you could 10 years ago. Therefore, it makes sense to me to delay paying the principle for as long as possible. My grandad bought a house many years ago for £3,000. He put down a £1,000 deposit and had a £2,000 mortgage. He spent 10 years slaving away to pay down that £2,000 mortgage. He would have been better off using an interest only mortgage as, because of inflation, the principle is nothing now! If you have an interest only mortgage, you can pay down the principle many decades in the future and benefit from inflation.