buy to let
A Buy to Let (BTL) mortgage is needed if you’re planning to buy a residential property to offer for rent. When you take out a BTL mortgage, you’re not allowed to live in the purchased property yourself.
Who can get a BTL Mortgage?
An application for a Buy to Let (BTL) mortgage is similar to a standard mortgage application in many ways, however, there are a few additional acceptance criteria.
Most lenders will require that you are a homeowner, with either a current residential mortgage or complete ownership. You will usually require a minimum salary of around £25,000 and a very strong credit score. There is also usually a maximum age restriction for applications. This will require that your mortgage is paid off before you turn 80.
How does a BTL mortgage differ from a standard residential mortgage?
As well as the purpose and application criteria, there are a few other ways in which a BTL mortgage is different than a traditional residential mortgage.
Both the fees and interest rates tend to be higher and the minimum deposit amount is at least 25%. It will also not be regulated by the Financial Conduct Authority (FCA), unless you intend to let out the property to close family members only.
Most BTL mortgages are interest only, rather than repayment. This means that you will have much smaller repayments, but will need to repay the lump sum borrowed at the end of the mortgage term. Many landlords sell the rental property in order to cover this payment.
How much can you borrow on a BTL Mortgage?
Perhaps the most different aspect of a BTL mortgage is how the lender calculates your loan amount. Rather than your personal income, the amount you can borrow is based on a projection of your rental income from the property. They will usually be looking for the rental yield (income from the property) to cover your monthly mortgage payments, plus 25%-45% depending on the lender.
Planning for when there is no rent coming in
Whilst a BTL property can provide a stable monthly income, it’s important to remember that there will be periods of vacancy. It’s important to bear this in mind when calculating your affordability.
It may be possible to set money aside for these periods. For those with less savings, there are rental protection policies available which cover this type of situation.
Consider saving to pay off the lump sum
Many landlords pay off the mortgage at the end of the interest only term through the proceeds of selling the property. It’s important to consider, however, that a drop in house prices could mean that this is not possible to accomplish. It’s also possible that a stagnant market will not allow you to complete a sale prior to the final payment date of your mortgage.
The Tax implications and advantages of a Buy to Let Property
There are a number of tax implication to be aware of before you buy a property to rent out:
- You will pay a minimum of 3% more stamp duty on a BTL property
- You will need to complete a self assessment tax return on income derived from the property
- When you sell a BTL property, capital gains tax of between 18% and 28% is due, depending on your tax band
- Any profits gained from the sale of a BTL property are also subject to a self assessment tax return
There is, however, the benefit of tax relief on your self assessment tax returns. The following costs involved in property rental can be reclaimed; property repairs, council tax and utilities (if you pay for them), letting agency and property management fees.
How can a Mortgage Broker help me to find the right BTL mortgage?
Buy to Let mortgages are quite common and you will find that both high street and specialist mortgage lenders have a wide range available. Choosing the right lender and the application process, however, can be difficult and confusing.
A Mortgage Broker can save you a lot of wasted time and effort by directing you to those lenders who are most likely to accept your application. They will look at your circumstances closely and match this against a plethora of suitable lenders. It’s probable that they will also have access to deals that you do not.
Last of all, in order to maximise the profit from your Buy to Let property, it’s vital that you obtain the best rates available to you. Brokers are able to look at the market as a whole and ensure that you are getting the most appropriate mortgage deal possible for you.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.