Buy-to-let mortgages carry some differences, such as higher interest rates and fees, and buy-to-let mortgage lending is generally not regulated by the Financial Conduct Authority (FCA), leaving you more at risk of encountering problems.
There are different types of mortgages, and you need to carefully decide which will be the best option for you. First off, you need to decide whether to take out an interest-only mortgage, or a repayment mortgage.
Interest-only loans carry lower monthly payments, because during the term you only pay the interest. Once the loan matures, then you owe the entire loan amount.
Interest-only loans are the more popular choice among those in the buy-to-let sector. It’s easier to meet the strict borrowing rules because of the lower monthly payments, although there is a greater risk of you encountering problems if the property value falls.
Repayment mortgages are when you pay back the interest and a portion of the loan each month. While the monthly repayments are higher, the entire debt is clear when it matures, because you have been paying it back gradually.
It may be worth seeking individual tax advice at this point, to help you make a decision on whether to get a repayment mortgage or an interest-only loan.
If you have this mortgage type, you don’t need a rental income covering 125 per cent of your mortgage payments, because you are paying off parts of the entire loan each month. Instead, calculate how much you would pay if you had an interest-only mortgage, and charge the tenants 125 per cent of that sum for their rent.
Repayment mortgages are more common for those taking out a standard mortgage to buy their own home.