Types of Buy to Let Mortgages
The two main types of buy to let mortgages are the interest only, and the capital and interest repayment products. These two forms can then be arranged on either a fixed rate, or a variable rate product (generally a discounted tracker).
The vast majority of buy to let products sold are interest only mortgages as the client will generally seek lower mortgage payments that in turn require a lower rent to cover the mortgage payment, importantly lower payments result in the client being able to take out a bigger loan.
Interest only products
These are generally arranged for between 15 – 40 years although almost none of them will be taken to term. Once a product’s initial 1-5 year ‘special rate’ expires the borrower will generally refinance onto a better deal with another incentive rate or period.
Capital and interest repayment products
This form is available (and often mandatory for commercial loans) which will eventually allow the mortgage to be repaid in full. Terms tend to vary from 10 –25 years with the shorter the term, the higher the monthly payments (and the higher the rent roll required for any given loan).
Either of these two forms of buy to let mortgage can be made available with initial incentive periods based around a fixed or a variable rate.
The variable rate will tend to be a discounted tracker, normally at a set percentage above Bank Base Rate or LIBOR (London Interbank Offered Rate) for a period of 1-5 years, which will then revert to the lenders Standard Variable Rate.
To keep the borrower tied in for the incentive period a lender will normally levy an Early Repayment Charge (ERC) of between 2-5% if the borrower were to repay the loan before this initial discount period expires.
Once the incentive period is over the ERC disappears and generally reduces over the course of this incentive period. Very occasionally an ERC can remain in place for a further period of time after the discount period expires (an overhang).