The UK housing market is an excellent place to invest if you have a big enough deposit.
You have various types of mortgages that allow you to enter the property market.
This blog compares two types: buy-to-let and residential mortgages.
What is a buy-to-let mortgage?
A buy-to-let mortgage is for properties that you own for the sole purpose of renting it out.
In other words, if you borrow this kind of mortgage, you can’t live in the property you took it out for.
Your mortgage payments will be interest-only. And when your mortgage term ends, you have two options:
- Pay off the remainder of the property and own it outright
- Sell it.
Different types of buy-to-let mortgages
Types of buy-to-let mortgage include:
- Interest only means that you only pay back the interest on your loan and nothing else.
- Fixed-rate: You take out a buy-to-let mortgage for a set period. And the interest rate has not changed over this time. Three years and five years are the most common.
- Variable rate: This is the opposite to a fixed rate buy-to-let. Your monthly payments fluctuate depending on moving interest rates. This means it could go either up or down.
- Tracker: Your lender sets your interest rate slightly above the Bank of England. It’s a type of variable rate that can change.
- Discount: You get a short-term discount with some lenders if you meet specific criteria. Do your research to see if you can apply for anything.
- Capped: This ensures your interest rate doesn’t exceed a certain ‘cap’. It can give peace of mind.
What is a residential mortgage?
A residential mortgage is for a house that you live in. It is the most common type of mortgage.
Borrowers slowly build equity in their property with each payment until they have paid it all off.
Types of residential mortgage
There are two main categories of residential mortgage:
- Fixed-rate: Your interest rate does not change for the agreed term.
- Variable rate: Your interest rate does change for the agreed term.
Other forms include:
- 95% mortgages: When you can only make a 5% deposit.
- Guarantor mortgages: When a loved one covers your missed payments.
- Joint mortgages: When you buy the property with someone else.
Differences between buy-to-let and residential mortgages
1. Prevalence
Buy-to-let mortgages are less common than residential ones.
In a recent calendar year, more than 211,000 buy-to-let mortgages were approved by UK lenders. This was 13.6% of total mortgage lending for the year.
By contrast, residential mortgages represent more than 50% of lending in the UK. This is the most common product that most UK lenders offer.
2. Reasons for taking out
Buy-to-let mortgages are taken out for various reasons, including:
- Investment: This can create a monthly profit. Also, if your house value increases, you can sell it at a profit
- Utilising spare cash: It’s a great way to utilise cash that isn’t being used. The return is often better than sitting in a savings account
- Grow short-term income: Your income will increase in the short-term because you’ll receive monthly tenant payments
- Tax advantages: You can avoid paying corporation tax in the short term by investing any leftover profits into a new property
Residential mortgages are generally taken out for the same straightforward reason:
- For the borrower to live in and eventually own a property.
3. Who takes them out
Buy-to-let mortgages are usually taken out by individuals. But they can sometimes be taken out by companies, too.
By contrast, residential mortgages are only taken out by individuals.
4. Deposit size
Buy-to-let mortgages usually require a larger deposit than residential ones.
Buy-to-lets usually require 25% deposits, whereas residential ones range between a 5% or 10% minimum.
5. Monthly repayments
Monthly repayments are lower for buy-to-let properties than an equivalent property on a residential mortgage.
6. Regulation
Residential mortgages are also regulated by the Financial Conduct Authority (FCA). Buy-to-lets are often not.
7. Limit
There is no limit to how many buy-to-let mortgages you can take out. But each bank may have an internal limit to reduce risk.
This forces you to switch elsewhere if you reach the threshold.
But there is a limit to how many residential mortgages you can take out.
