How to Calculate a Buy to Let Mortgage
Buy to let mortgages are generally reserved for savvy real estate speculators. The mortgage differs from a traditional mortgage in that the underwriter allows for projected rental income to be figured into the debt-to-income ratio before the loan is funded. Mostly, buy to let mortgages are used to purchase large, multi-unit rental properties. Understanding how to calculate these mortgages is important because investors must know what their monthly outgo will be.
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Instructions
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Collect your mortgage proposal paperwork. This will include the proposed amortization schedule (which tracks how much each monthly payment will be applied to principal and interest), the APR, the monthly payment, the principal loan amount, the term (length) and the discounted variable (the discount at which the mortgage rate is priced). You'll need all this information to calculate the mortgage.
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Determine the amount of monthly rent you expect to garner from the property. You may not have all the leases from tenants yet (if, for example, you haven't closed on the property), but make your best estimate as to the dollar figure you expect to gain from rental income each month. A good practice is to estimate conservatively so as to not give yourself a false impression of your monthly cash flow.
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Find the value of the property or estimate the value of the property with the help of an appraiser. This figure is especially important to the calculation as it determines the loan to value that your property will be saddled with. Loan to value (the value of the property versus the outstanding loan on the property) controls the rate at which funds are extended to investors. Higher LTVs mean higher rates and vice versa.
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Calculate the mortgage. The best way to do this is to use an online calculator (see Resources). Enter the property value, the discount rate, the term, the principal loan amount, and the projected rental income and press calculate. The mortgage calculator will provide the Loan-to-Value, the percentage of income versus mortgage payment and the return you can expect to garner on the property.
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