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Buy to Let Mortgages

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What is a buy-to-let mortgage?

If you’re buying a property that you plan to lease out to a tenant, you’ll need to apply for a buy-to-let mortgage.

As a rule, lenders treat buy-to-let mortgages differently from homebuyer mortgages – they often charge 1-2% more interest, and will require a higher deposit. Lenders may also evaluate your application in a different way and subject it to different criteria.

When buying, it’s important to tell your mortgage broker whether you’re planning to move into the property or whether it will be let out. Your broker can help you find the right product for you and get your role as a landlord off to a flying start.

What are the benefits of buy to let?

Many people see property as an attractive investment and it remains a popular option in Britain. Buy-to-let offers a number of long-term benefits, including:

  • Income from rent
  • The possibility of rents increasing above inflation
  • Potential value growth if property prices increase

If your property’s value rises, you stand to make a profit when you sell, especially if you buy in a booming area. Alternatively, if property prices remain stable, your rental income may be sufficiently high to pay off a large chunk of your mortgage and help build equity in the property.

Of course, there are no guarantees that property values will continue to rise, and you should consider the possibility of your property’s value staying the same over the years, or even decreasing if the market weakens.

Similarly, while rental incomes have grown strongly in certain areas, these may stabilise or drop off as the market shifts. Even if you buy in a high-rent area, your property may remain vacant, meaning you’ll need to cover mortgage payments out of your other income.

If you’re considering taking out a buy-to-let mortgage, it’s worth weighing up whether the property you’re considering is a good investment. You can also find out more about the potential costs with our buy-to-let mortgage calculator.

How to get a buy-to-let mortgage?

The buy-to-let mortgage market is quite competitive, but lenders still tend to be more cautious than before the financial crisis of 2007. Lenders will often use the following criteria to decide whether to approve a buy-to-let mortgage:

  • Typically, you’ll need a 25% deposit on the purchase price.
  • For new-build homes, you might be required to put down a 35% deposit, as these are seen as riskier investments by some lenders.
  • Most lenders will ask for evidence that the market rate for rental income is at least 125% of the mortgage repayments

You can use our buy-to-let calculator to get a better idea of how much you may be able to borrow.

It can also be possible for first-time buyers to take out a buy-to-let mortgage, although this can be a tricky experience depending upon your situation. Check out buy-to-let mortgages for first-time buyers for more information if this is something you are interested in.

Do you qualify for a buy-to-let mortgage?

In addition to the above criteria, many lenders also insist on you meeting a range of personal criteria. Common factors that are taken into consideration include:

  • Minimum age (often 25+)
  • Minimum income (usually £25,000+)
  • Successful credit check

Additional qualification criteria may apply for landlords looking to put together a portfolio of several properties – this is discussed in the ‘Experienced landlords – Setting up a portfolio’ section of this guide.

How to get the most from buy-to-let as a landlord

If rental income is your main priority as a property investor, it’s worth trying to maximise your rental yield. Rental yield is calculated by dividing the annual rent you will be earning from the property by the property value, which is then expressed as a percentage. For example:

Annual rent – £24,000
Property Price – £300,000
Yield – (24,000 / 300,000) x100 = 8%

But keep in mind that the rent you earn on the property will also go towards other costs, such as:

  • Mortgage repayments
  • Letting-agent fees (Whether you wish to use a letting agent or rent out yourself is another decision to make on buy-to-let properties)
  • Buildings insurance premiums
  • General property maintenance

These costs will reduce the rental yield on the property. For example, if you spent a total of £1,200 per month on the above costs, your net income for the year will fall to £14,400 per year, producing a yield of just over 3%.

Annual rent minus costs – (£24,000 – £14,400) = £9600
Property Price – £300,000
Yield – (9600 / 300,000) x100 = 3.2%

From this 3.2% you will also have to pay income tax. A full guide to tax that may be applicable to landlords can be found below.

You should also factor in the possibility of extended periods without rent – for example, if you struggle to find a tenant. These factors are discussed further in our buy-to-let guide.

As this demonstrates, it’s vital to do your sums before embarking on a buy to let mortgage to ensure you are earning enough to make it a worthwhile investment.

A guide to tax for landlords

Getting your tax arrangements absolutely right is a key part of buy-to-let investment. If you fail to get to grips with the rules, you could find yourself landed with sudden and unexpected bills, or even end up in hot water with the authorities. Here is a quick rundown of some of the tax payments you may have to make:

Stamp duty
Stamp duty is a lump sum tax that is payable when buying a property. For buy-to-let, any property purchase worth over £40,000 is liable for stamp duty. In addition, buy-to-let investors need to pay an additional 3% surcharge on top of the standard stamp duty rate.

Find out how much tax you’d need to pay on your buy-to-let property with our buy-to-let stamp duty calculator.

Income tax
Income tax is payable on rental income you receive – the rate at which you have to pay will depend on how much rent you’re earning, as well as how much other income you have.

You’re required to declare your total rental income on a self-assessment tax return each year. The form also gives you an opportunity to disclose costs, such as letting-agency fees, water rates and insurance, which you can deduct from your rental income. Maintenance costs may also be possible deductions – but only for repairs which allow you to continue renting out the property; not for improvements that boost its value.

Income tax relief changes from 2017
Previously, landlords were able to deduct interest payments on their mortgage from their rental income. But from April 2017, the tax relief available to landlords has changed – a move that may be more noticeable for higher-rate taxpayers.

Over the next five years, deductions will gradually be restricted to smaller percentages of mortgage interest. By 2021, no mortgage interest will be deductible at all.

Instead, landlords will be able to claim a basic tax-rate reduction, amounting to 20% of their mortgage interest. In practice, this means landlords who pay at the basic tax rate will be unaffected, while those who pay at higher rates are likely to see their bills climb.

Regulations are also changing around the wear-and-tear allowance. Previously, landlords offering furnished properties were able to deduct 10% from their net rental income for ‘wear and tear’ on their furnishings. As of 2016, landlords are only able to claim deductions for the actual cost of replacing or repairing furnishings.

Capital gains tax
There may be capital gains tax to pay on profits from the sale of buy-to-let properties.

While any profit on the sale of your main residential home is tax-free, capital gains tax is currently payable on any other properties you sell, at either 18% or 28%, depending on your total taxable income. However, you’re allowed a certain amount of gain each year before tax becomes payable – as an example, the capital gains tax allowance in the 2015-16 tax year is £11,100.

Inheritance tax
Any buy-to-let property you own will count towards the value of your estate for inheritance tax purposes. The value of the property, minus any outstanding mortgage, will be considered part of your estate inheritance tax, which is 40% of the value of an estate, is payable above a set threshold and depends on who is inheriting your assets.

Find out more information on whether buy-to-let is a good investment for you.

Finding the right buy-to-let mortgage

Finding the right buy-to-let mortgage deal can help you ensure a good return on investment. Since buy-to-let mortgage deals pose a bigger risk to lenders than regular mortgages, they tend to be more expensive. However, you can find the best deals by taking into consideration several factors:

  1. Compare rates – although buy-to-let mortgages do tend to be costlier, good rates can still be found. Taking time to find the right deal can pay off – you can use our rates tables to compare buy-to-let mortgage rates.
  2. Deposit amount – the minimum deposit tends to be 25% on buy-to-let mortgages, but putting down a larger deposit can result in a better deal
  3. Type of mortgage – most buy-to-let mortgages are interest only, meaning that you would have to sell the property to clear the loan or make lump sum payments. But repayment mortgages do exist, so you may be able to find the one that’s right for you.

Experienced landlords: setting up a portfolio

Setting up a portfolio of properties can be significantly more complicated than owning a single buy-to-let.

Depending upon who is offering the best deals when you buy each property, you may have mortgages from several different lenders.

Furthermore, lenders can sometimes apply additional limits to borrowings to landlords with several properties, including:

  • Limits on the number of properties on a single mortgage
  • Maximum number of mortgage agreements being offered
  • Maximum number of mortgage agreements being offered from lenders who form part of the same parent company
  • A limit on total amount loaned

Lenders can also have certain reservations on lending, depending on the risks associated with certain property types. Some areas of concern can be:

  • Former local-authority-owned properties
  • New-build properties
  • Studio apartments

Lenders may also take into account the age of the applicant. Some lenders set maximum ages by which they expect the loan to be repaid, normally between 70-90 – this can be an issue if you’re looking for a buy-to-let investment to supplement your income.

Take independent advice

The additional costs that can be associated with buy-to-let mortgages make it crucial to find the best deal for a long-term investment. We know this can be a complicated process, with different borrowers offering different mortgage options and rates.

Our expert mortgage advisers will search thousands of mortgage deals to help pick out the one that’s right for your circumstances, in addition to providing you with all the information you need to make the best decision.

Our advisers are paid a salary rather than commission from lenders – so you can have confidence that you’re receiving truly impartial advice. Contact us today to chat to one of our advisers or arrange a call back.

 

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