What is the Difference Between an Owner-Occupied and Buy-to-Let Mortgage?
- 6th July 2018
- Posted by: Loanable
- Category: Resources
Getting on the property ladder is a huge financial step for anyone. Buying a property, which is to be your home, is probably the single largest purchase you will ever make. That is unless you buy multiple properties over time, and set out to be a property tycoon or mogul.
There is something to be said for owning various properties, and being paid rent each month, and having the properties as your business.
It is called being a landlord.
And as a landlord you have certain responsibilities, to your tenants, yourself as a business person, and also some legal responsibilities.
Mortgages a General Overview
When buying a property, be it your first property, your tenth property, or a property that is an investment and you plan to let out, more often than not, you are going to need to borrow the money to buy the property.
Properties are expensive, and not all of us have an extra £150,000 or so just lying about. So we need a loan to buy a property, and loans granted to buy a property are called mortgages. The loan or mortgage to buy the property is also then secured by the property.
By having the loan secured by the property, it give the bank or lender more security in granting the loan. The lender has something they can repossess, should the borrower default on payments.
Also in addition to being secured by the property, it is hoped that as time passes property appreciates in value, which means it goes up in value.
This also makes lenders happy in granting a mortgage, as there is the hopes they should not experience a loss if they did have to repossess the property.
Since mortgages are such large loans, the terms for these are longer than most loans. Mortgages can be paid back over 10 years, 15 years, or longer. In the United States a few years back, lenders introduced a 40 year mortgage for some buyers.
The way lending money works is that the longer the term of a loan, the more it reduces the monthly payments. It also has the borrower pay more in interest due to the longer time period.
The process of approving a mortgage loan is called underwriting, it is the underwriting process that the bank or lenders does to make a decision as to I they will grant/approve the loan or not.
Regardless of the type of mortgage you apply for, the underwriting process consists of the same basic principles:
* Credit history
* Price and value of the property
Those are the major factors reviewed, and from there the lender may look at other factors, your job, the area the property is located, and of course the condition of the property.
Just as there are options and choices with just about everything, there are choices or types of mortgages to be had.
* Interest only mortgages: These are mortgages where the borrower only pays the interest each month on the loan.
* Tracker or variable rate mortgages: Tracker mortgages are loans linked to a “base rate” which usually is the Bank of England base rate. The borrower pays a rate above this base, such as if the rate is 2%, and the base rate is .5%, the borrower pays 2.5%.
* Fixed rate mortgages: The interest rate is fixed at the same rate for the full term of the loan.
* Residential mortgages: Mortgages for people buying properties to live in, and not for commercial use.
* Commercial mortgages: Properties used for commercial use, stores, shops, offices, etc.
* Buy-to let mortgages: A mortgage specifically granted to a borrower who plans to not live in the property, but let the property out.
* Owner-occupied mortgages: A mortgage granted to a borrower who plans to live in the property and occupy the property.
Differences Between Buy-to-Let and Owner-Occupied Mortgages
As we can clearly see, the main difference between these two types of mortgages is that one is for those that will live or occupy the property they are borrowing the money to buy, and one mortgage (buy-to-let) is for someone not planning to occupy the property, but rent/let the property out to a tenant or tenants.
The more subtle differences are in the underwriting process and type of mortgage the borrower may be considering.
When you buy a property to live in you need to show affordability, that you can afford the payments, this is usually through having a job/wages, and a monthly income.
In a buy-to-let mortgage, the lender may allow part or all of any rent the borrower or landlord may charge tenants, as a part of the affordability factor.
Different lenders use different formulas, and amounts of any future rent to be considered as repayment and in underwriting and approving the loan.
Depending on the types of properties purchased, the lender can have different conditions on the loan, one being insurance on the property.
Both types of loans, buy-to-let and owner-occupied will require building insurance, however in a buy-to-let there may be some furnishings the landlord/borrower needs to insure as well. There may be multiple occupants or flats within the building, so the insurance requirements can be different.
In addition, a high percentage of buy-to-let mortgages will be interest only loans. This is due to the fact the borrower/landlord, wants to keep the monthly payments as low as possible to maximise their monthly profits.
Lenders in granting mortgages, especially buy-to-let mortgages, also look at experience.
If you are a first-time property buyer getting an owner-occupied mortgage, your are underwritten in the same way as someone getting their second or third mortgage as they sell and buy a new house.
A first-time potential landlord looking to get their first buy-to-let mortgage, may be looked at more closely that an experienced landlord with a property portfolio and a proven record of success.
While the main difference between the two mortgages is as to if the borrower is going to reside in the property they are requesting the loan for, it is important to note, if you buy a property and do not live in that property, you must have a buy-to-let or some form of mortgage that is not an owner-occupied loan.
As we will find out in later postings, by not having the proper mortgage on a property, you may find yourself in some financial dire straits.