Buy To Let Mortgages

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What Is a Buy-to-Let Mortgage?

A buy-to-let mortgage is a type of mortgage specifically for properties that are owned or purchased with the intention of renting them out.
If you rent out a property on which you only have a residential mortgage, you’ll be in breach of your mortgage agreement which could put your property at risk of repossession.
Buy-to-let mortgages are often set up on interest-only bases, which means you only make monthly interest payments each month. The outstanding loan balance – i.e. the amount you borrow – is paid back at the end of the mortgage term via a suitable repayment vehicle, like the sale of the property.

Buy to let guide

A buy-to-let is a property purchased with the intention of renting it out to tenants. You can make a hefty profit as an investor of a buy-to-let property, you just need to make sure you plan appropriately and weigh up the income with the costs. It’s also fundamental that you seek tax advice before you take the plunge.
Successful buy-to-let investing in the current housing market is not without its issues. Like all investments, there are risks associated with buying-to-let. Increased taxes, greater regulation and higher costs are the new realities of today’s private rented sector.
Being a landlord requires a lot of time, planning and money. You don’t want to buy a luxury property that you can’t afford to manage. Equally, you don’t want to throw money at a subpar investment. You need a thorough understanding of your capacity, aims and finances to ensure that your venture is realistic and aligns with your budget.
To assess whether a buy-to-let property is a worthwhile investment, you should look at things like rental yield and potential capital growth.

See below for more information.

Rental Yield
Rental yield measures the ongoing return on investment for a property. You should always consider your potential rental yield before purchasing a buy-to-let. Get an idea of the potential rental yield of your buy-to-let investment by using our simple
Capital Growth
Capital growth, also known as capital appreciation, is the amount that the property increases or decreases in value over time. This is normally due to changes in the property market or improvements to the property. Working out your potential capital growth can help you decide what work to do on a buy-to-let and when could be the best time for you to sell.
Example:

  • You purchase a property for: £250,000
  • It’s current market value is: £300,000
  • The capital growth is: (£300,000 – 250,000) = £50,000

DEPOSITS FOR BUY-TO-LETS, COSTS AND TAX RELIEF

Not everyone has masses of savings neatly set aside, ready to invest in a new property by purchasing it outright with cash. But that’s not always an issue. In fact, a lot of people will take out a buy-to-let mortgage to reduce their initial cash outlay. They’re quite straightforward and specifically designed for buy-to-let property investments.
A buy-to-let mortgage allows you to borrow a large sum of money to purchase a property that you plan to rent out. They function similarly to a typical residential mortgage; the main differences are that buy-to-let mortgages usually require a bigger deposit and have higher interest rates. A deposit for a buy-to-let is around 25% of the property value. Buy-to-let mortgages can vary greatly and the offers available are subject to many different factors, e.g. how much deposit you can put down, how much you can pay back every month, etc.
Lenders use a rental affordability calculation to determine whether they think your buy-to-let mortgage is financially feasible. They’ll likely use an affordability calculator which sometimes takes into account your personal income and potential rental income against the amount of money you wish to borrow. Most lenders will insist that the monthly rental income must be at least equal to 145% of the monthly mortgage payments on an interest-only basis using a nominal rate of around 5%. For basic rate taxpayers this can be 125% rather than 145%. Some lenders can take personal income into account as well to support this calculation.
You must meet certain eligibility criteria to successfully receive a buy-to-let mortgage. For instance most lenders have a minimum personal income requirement, often at least £25,000 per year. You need to prove that you can comfortably cover the costs of the investment. This can include survey fees, solicitors’ fees, Stamp Duty Land Tax and other expenses. Lenders generally do not accept applications for buy-to-let mortgages from first time buyers, but a few do.
Stamp Duty Land Tax on Buy-to-Let Properties
You pay Stamp Duty Land Tax on properties and land in England and Northern Ireland that cost over a certain amount. Stamp Duty applies to both freehold and leasehold properties, purchased outright or through mortgage financing.
If you purchase a residential property that’s not your main residence, e.g. a second home or a buy-to-let, you pay a 3% surcharge on the standard Stamp Duty rates.
Income Tax on Buy-to-Let Properties
Owners of buy-to-let properties also need to pay Income Tax on rental income. You’re permitted a £1000 allowance, or you can deduct certain expenses. To learn more, see our comprehensive guide on Rental Income and Other UK Landlord Taxes.
Insurance
Most buy-to-let mortgage lenders demand that you have buildings insurance in place. It’s important that you select insurance with your long-term plan in mind. If you think you’ll extend your property portfolio in the future, you might find it useful taking out a policy that allows you to add additional properties later. What’s more, depending on the terms of the contract you supply to your tenants, you may be responsible for covering contents insurance and liability insurance. Thinking ahead when you take out your policy will help make sure you don’t limit yourself later on.
Survey Fees
Survey fees can include everything from the cost of a simple property valuation to a full structural survey. The necessary level of investigation into your property will depend on your lender, the mortgage you’re applying for and the type of property you’re purchasing. As a rule of thumb, a standard valuation will do just that – confirm the value, give a rental assessment and judgement if the property is suitable security for lending. A homebuyer’s report will give all that is on a valuation as well as a report on the actual state of the property.
Maintenance Fees
Buy-to-let maintenance costs can sneak up on you. Landlords are responsible for the upkeep of the property, as well as managing the rental income. This can become hectic. You may want to consider hiring a letting agent to manage the property for you, especially if you’re often juggling multiple investments/properties.
Letting agents obviously come with additional costs; they tend to charge a percentage of the rental income plus VAT. Nonetheless, they can seriously reduce some of the day-to-day hassles associated with buy-to-let investments.

Why Should You Use a Buy-to-Let Mortgage Broker?

Mortgages are complicated and it’s a broker’s job to find you a suitable product.
But why is it so important to use a broker for a buy-to-let mortgage?

  • It’s not always easy to find the right information about the potential property types or the affordability criteria you need to meet for a buy-to-let mortgage online. We know the requirements for each lender and will look at your entire situation and future needs, so we can advise you accordingly
  • Some lenders require that you use a buy-to-let mortgage broker and won’t accept applications directly from borrowers, which means we can give you access to more lenders and better rates
  • Buy-to-let mortgages can be particularly complex, especially if you’re a new landlord. We make sure you understand how it all works and exactly what mortgage you’re applying for