A landlord’s guide to mortgages
Our Landlord’s Guide to Mortgages is designed to help you understand the different mortgage types open to buy-to-let properties – and which will maximise the potential income from your investment.
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First things first, it’s important to work out what you can reasonably afford to repay over and above your mortgage payment each month. Factor in other household outgoings – for instance; bills, transportation costs, food and any other loans or credit cards – and balance these against your monthly income.
Once you have established how much extra you can pay per month, check that the lender will allow you to make overpayments. If agreed, these overpayments will quickly reduce your mortgage balance thereby allowing you to pay off your mortgage early, sometimes saving you tens of thousands of pounds in additional interest.
We can’t stress this enough – always, always choose a home that’s well within your budget. If your mortgage is too high, you’ll never be able to afford to make overpayments.
If you have your sights set on an expensive town or village, look at the areas just outside of your dream location – there could be bargains to be had. If the location is non-negotiable, make concessions with your property. Either compromise on size or, better still, look into buying a project. As long as your new home is habitable, you can make the changes you want to over time, as and when you can afford to.
Next, establish a contingency plan in case you lose your job or are forced to take statutory sick pay. Do you have safeguards in place in the event of these? If not, it might be a good idea to look into income protection insurance, critical illness cover or one of the many other insurance products homeowners are well advised to take. After all, if for any reason you can’t pay your mortgage, your dream of becoming mortgage free will take longer than you’d hoped, or may be not achieved at all.
There’s no escaping it. To become mortgage free, you’ll need to focus on ways to reduce your overall outgoings. This means shopping around for cheaper deals on your everyday essentials and going on fewer nights out or expensive holidays.
Saving up for the deposit on your home shouldn’t be such a distant memory so try to tap into how you managed to acquire such an impressive sum and adopt those practices again now. Work any paid overtime that’s offered to you and put your earnings towards your mortgage pot.
If you’re fairly confident that you’ll have the means to pay a higher monthly repayment going forward, you could look into reducing your mortgage term with your current provider, or look into which other mortgages might be more suitable for you, with this new goal in mind.
In the midst of economic uncertainty, many homeowners are currently taking up long-term fixed rate mortgages (i.e. 5-10 years). Although the rates for these aren’t quite as favourable as shorter-term fixed rate mortgages (i.e. 1-3 years) and they may be subject to a mortgage fee, the pros for these kinds of mortgages far outweigh the cons.
It goes without saying – until you start paying off the principal, your mortgage amount will never truly reduce. So, if you currently have an interest-only mortgage, switch to a capital repayment which will allow you to start making a real dent in what you owe, and not just the interest accrued. Need help with finding one? Mortgage Matters Direct will be able to suggest a capital repayment mortgage to suit your needs.
If you don’t want to take the risk with reducing your mortgage term, you could always just arrange to overpay
Bear in mind, some mortgages incur an early repayment charge so you’ll need to keep within the acceptable limits. Overpaying simply isn’t worth it if you are subject to these charges.
Look at your mortgage agreement to find out how much you’re allowed to overpay by – most lenders normally permit up to 10% annually – and work out how much you can reasonably afford to contribute towards this. Remember, every penny counts. Take a look at our calculator and see how even the smallest of overpayments could knock years off your mortgage term.
Consider renting out any extra rooms that you have in your home. The extra income that this will bring in will more than cover your extra mortgage overpayments.
Bear in mind, your mortgage provider will have to be alerted about this change in circumstance. Some lenders will allow you to do this under your existing residential mortgage however others may insist that you switch over to another mortgage completely.
In any case, the money you can make from renting out a room will more than make up for the extra paperwork. Enlist the services of a mortgage broker and this process will be made even more seamless.
Hopefully, if you’re financially savvy enough to want to clear your mortgage, you’ll understand that an adverse credit score isn’t in your best interest – even after you’ve been accepted for your initial mortgage.
If you’re paying for loans – including your mortgage – by direct debit, make sure that you don’t ever default on these repayments. Choose a payment date that’s the day after pay day, so there should always be the available funds to make this repayment.
A good credit record coupled with little to no extra borrowing should help you to be accepted for a better mortgage product, if and when this occurs. Which brings us to…
Your LTV – or loan-to-value – could clinch you a better mortgage rate, helping to make you mortgage free in no time. But, how?
Put simply, the greater the value of your home – that is, the market price your home would achieve today – and the lower the amount that you have left to pay on your mortgage, the lower (and better) your LTV will be.
A low LTV will give you access to a range of competitive mortgages which most borrowers simply wouldn’t be eligible for. These could have lower interest rates, longer fixed rate terms or even a combination of the two. Once your LTV gets to around 50%, it’s well worth getting in touch with a mortgage broker to find out what you could now be eligible for.
For more advise on how to reduce the term – and therefore, total repayable amount – on your mortgage, chat with one of our advisors.