Free Return on Investment (ROI) Calculator for Buy-to-Let Property Investments

Fixed rate mortgages have an interest rate that stays the same for a set period of time. This initial period could range between two to 10 years. Your mortgage repayments are therefore the same every month and you don’t need to worry about movements in interest rates. It’s important to consider that the majority of vendors will charge you an early repayment charge (ERC) if you choose to exit the mortgage before the end of the fixed term.

Interest rates adjust periodically with a variable rate mortgage, which means repayments may change throughout the loan term. Usually, the interest rate changes in relation to another rate – the Bank of England’s base rate is very influential on variable interest rates, as is the base rate of each lender.

For standard variable rate (SVR) mortgages, each lender has an SVR that they can move when they like. In reality, this tends to roughly follow the Bank of England’s base rate movements. SVRs can be anything from two to five percentage points above the base rate – or higher – and they can vary massively between lenders.

The other type of variable mortgage is a discount mortgage. Instead of being linked to the Bank of England base rate, discounts are linked to the lender’s standard variable rate (SVR). For example, if the SVR is 3.50% with a discount of 1%, the payable mortgage rate is 2.50%. If the SVR rose to 6.00%, the pay rate would rise to 5.00%.

The problem with discounts is that SVR changes are at the lender’s discretion so your mortgage payments could go up even if there has been no change in the Bank of England base rate. What’s more, even if the SVR changes following a move in the base rate, there is no guarantee that it will increase or decrease by the same amount.

For example, when the Bank of England base rate fell from 5.00% to 0.50% between Oct 2008 and Mar 2009; Lloyds TSB was the only top 20 lender to reduce it’s SVR by the full amount of 4.50%. All other banks cut their rates by less.

Most mortgage deals carry arrangement fees, which can vary from a few hundred pounds up to a couple of thousand. Also bear in mind that these set up costs can sometimes be made up of two fees. An increasing number of lenders charge a non-refundable booking fee, which is effectively a product reservation fee. If your house purchase falls through and you don’t end up taking the mortgage deal, you won’t get this fee back.

The second type of fee is an arrangement fee which you pay on completion of the mortgage so you won’t have to pay it if, for any reason, you don’t take the mortgage. These mortgage fee’s can often be added to the loan itself, so you don’t always have to pay upfront.

You may also be charged a brokerage fee if you decide to use a mortgage broker, which is often advisable if you’re a buy-to-let property investor. Using a financial advisor is even advisable if you plan on buying via a Limited Company as your purchasing vehicle as there are typically fewer options available to Companies and deals can be harder to find. Broker fee’s can range from as little as £0, to as much as a few thousand pounds. Typically fee’s will be charged and will be higher for more complex cases. We always advise shopping around and talking to a few brokers before commiting to a process.

A buy-to-let mortgage is a mortgage sold specifically to people who buy property as an investment, rather than as residential purchase (i.e. a place to live). If you intend to rent out your property, you won’t be able to finance your purchase with a standard residential mortgage.

Unlike most residential mortgages, buy-to-let mortgages are usually offered on an interest-only basis, as well as on a traditional repayment basis. This means that your monthly payments will only cover the interest on your mortgage. Your capital debt (i.e. the original amount of money borrowed) will not go down over the term and you will need to find a way to pay it off at the end of the mortgage term to satisfy the loan. You could do this by selling the property, or you could keep the property and take out another mortgage.

A buy-to-let mortgage typically requires a minimum deposit of 25%. You’ll also have to pay higher fees and pay a higher rate of interest when compared to a residential mortgage product. You will also have to pay more stamp duty for any property that is not your main home.

Investor’s often prefer buy-to-let mortgages when maximising monthly income and cash flow is a priority over residual equity. This is because you retain more of your monthly income which can be drawn down or accumulated for re-investment, compared to paying higher monthly mortgage repayments short term and seeing a higher return in terms of residual equity at the end of the mortgage term.