Buy to Let Mortgages – what you need to know
When you are buying a property to rent out to residential tenants you need a special kind of mortgage. There are some important aspects of a Buy to Let mortgage to be aware of.
How do Buy to Let mortgages work?
A Buy to Let mortgage is a loan designed to help you buy a house or a flat and rent it out to tenants. Buy to Let mortgages usually require a bigger deposit (typically at least 25%) than residential mortgages, and interest rates are often higher.
If you are renting a property out, your mortgage must be on a Buy to Let basis. In some cases, you can convert a standard mortgage to Buy to Let – for example if you are moving away and renting out your home.
Who can get a Buy to Let mortgage?
Getting a Buy to Let mortgage requires meeting some specific criteria. While these will vary depending on the mortgage lender, a common requirement is for you to own your own home which you reside in. It is also much easier to get a BTL mortgage if you have a good credit history. buy-to-Let mortgages can be difficult, but not impossible, to obtain for first-time-buyers. Additional criteria to provide comfort to the lender will be provided
Lenders are less concerned about a customers age as the mortgage cost is, in effect, being covered by the rental income. Whereas a normal residential mortgage would need to repaid in line with retirement expectations, buy-to-let lenders will often go to age 80, 85 or even 90 years of age. Making this an ideal potential investment proposition for those already, or close to, retirement age.
How much can you borrow on a Buy to Let mortgage?
Unlike a residential mortgage, which is based on your income, a Buy to Let mortgage is based on the gross (before letting agents fees) monthly rent you are likely to receive or are already receiving on the proposed property.
Lenders apply what can look like quite complicated calculations to assess how much they will lend based on the likely rental income. They will usually look for coverage over and above the mortgage payment even when assessed at an interest rate of around 5% with additional comfort required depending on an individuals tax banding.To help soften this (and potentially lend higher amounts) lenders will often reduce these ‘stress rates’ when taking a 5 year fixed rate.
Often the lender will want you to be earning a separate income in addition to any profit from the rent. Some banks have no such minimum income requirements which opens up the market to low earners, housepersons and retired customers. Use a mortgage calculator to explore how much you could borrow and what the monthly repayments will be.
What happens when the property doesn’t have a tenant?
There are some potential risks in letting out residential properties so it’s important to plan for these and have a contingency fund.
First, remember that there will sometimes be gaps where there is no tenant in the property – which means you won’t receive that month’s rental income. You will still need to pay the mortgage, however, which might require some savings.
Successful landlords will both attract tenants and make a profit. A rent that’s too high for the type of property or the area could mean you’re unable to let the property. A rent that’s too low won’t generate much profit for you.
There are also some rental property costs to plan for, such as annual gas safety checks, letting agent fees, advertising, and general maintenance. You will also need landlord’s insurance, which is similar to home insurance.
Interest only or Repayment mortgage?
As with standard mortgages, you can opt for a repayment or an interest-only mortgage. Many landlords choose interest-only, where the monthly payment simply pays the interest on the loan – it doesn’t decrease the overall debt. You can also choose between fixed rate and variable rate Buy to Let mortgage deals.
The advantage of interest only Buy to Let mortgages is that they have smaller monthly payments, giving you more profit from the tenants’ rent.
The disadvantage, though, is that at the end of the mortgage you will need to repay the entire mortgage loan. While many landlords rely on the opportunity to sell the property to settle the debt, this can be a risky approach. Property values can go down as well as up.
Buy to Let mortgages and tax
When you buy a property to let out you’ll have to pay a minimum of 3% additional stamp duty, unless this is the first property you have bought. Buy-to-let stamp duty rates are tiered according to the value of the property. You can use the government’s stamp duty calculator to explore how much you will need to pay.
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You will also need to pay income tax on the profit from your rental property. Some landlords choose to appoint an accountant to manage their tax responsibilities.
How can a Purely Financial Planning broker help with Buy to Let?
Buy to Let mortgages are seen as a commercial loan rather than a traditional mortgage, and the lenders are more business focused. Many of them only operate via mortgage brokers, so it’s even more important to seek expert advice to get a competitive deal.
At Purely Financial we have many years’ experience in working with both first-time landlords and portfolio landlords to explore the most appropriate options for their Buy to Let mortgage. We are fully registered in England for financial advice and guidance.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages