Buy to Let
What Are Buy to Let Mortgages?
A Buy to Let Mortgage is a mortgage product that is required for any property purchases that are made specifically with the intention of offering them as residential rental properties. Once you have purchased a property via a Buy to Let Mortgage, you will not personally be allowed to live in the property, even on a temporary basis.
You are sometimes able to convert Standard Residential Mortgages into a Buy to Let mortgage, however, if you choose to move out of your own home and use it as a rental property. Not all lenders will provide this facility, however, and there will be additional criteria to meet.
Who can get a Buy to Let Mortgage?
Anyone who is able to meet the criteria of a Buy to Let mortgage is able to apply, however, the criteria to fulfill are more substantial than those required for Standard Residential Mortgage.
Buy to Let mortgage applicants will most likely be required to meet the following criteria:
- Earn £25,000 or more (Self-Employed or employed income)
- Have a strong credit score
- Own your own home (permanent residential property)
- Have substantial time to repay the mortgage before you turn seventy
- Previous landlord experience is often also required, but not by all lenders
How does a Buy to Let Mortgage differ from a Standard Residential Mortgage?
Once in place, the way in which Buy to Let Mortgages work doesn’t really differ to a Standard Residential Mortgage, other than the fact that mortgages are most likely to be Interest-only rather than repayment. They are also not regulated by the Financial Conduct Authority unless the express reason for its purchase is to provide a rental property for close family members.
The application process and how the mortgage is assessed, however, is quite different to a Standard Residential Mortgage. For example:
- Most lenders will offer a maximum Loan to Value of 75% for a Buy to Let property, meaning you’ll need at least 25% deposit
- Fees associated with arrangement are usually higher
- Interest rates are higher than for other mortgage types
- How much you can borrow is not based solely on your income
How much can you borrow with a Buy to Let Mortgage?
When you take out a Buy to Let Mortgage, you will usually (but not always) need to meet a minimum income requirement, however, this is not used to calculate your loan. Some lenders will allow you to use Top Slicing. This is where the individual’s personal income is used to top up any shortfall in rent needed by the lender’s criteria when applying for a Buy to Let mortgage. Not all lenders allow Top Slicing but it can be useful if the rental income is a little low in relation to the size of mortgage required.
Loans are calculated based on the potential rental yield (income) of your rental property. Lenders will want the income to cover 125 -145% of your mortgage payments, so it’s important to research local house prices and rental prices charged at similar properties, before you apply.
Planning for when no rent is coming in
Buy to Let properties offer strong investment potential, however, it’s important to plan to cover your mortgage repayments whilst the property is vacant. We can recommend adequate landlords insurance or rental protection policies that cover you for periods of no rental income.
Ensure you can repay the loan at the end of the mortgage term
Most landlords sell their rental property at the end of the Buy to Let mortgage term to pay off the loan. Given that Buy to Let mortgages are Interest-only, the loan amount will not have reduced since you took out the mortgage, so you will owe the full amount.
Whilst this is usually a good repayment option, unpredictable circumstances, such as failure to sell the property or a low sale price, could mean this is not feasible. It’s advisable to have a backup plan to cover the final mortgage payment, should you experience this type of issue.
The Tax Implications and benefits of owning a Buy to Let Property
- Any properties owned (in addition to your residential home) are liable for an additional 3% Stamp Duty fee, where they are worth £40,000 or above
- Income tax will be due on all rental income
- Capital Gains Tax is payable on the sale of rental properties
- Income tax is payable on profits of sale of rental properties
As a standard rate tax payer, you get some tax relief on the costs of being a landlord, such as property repairs, letting agent fees and utility bills (where you’re responsible)
How can Assured FG help?
Buy to Let Mortgages can be fairly complex, especially if you are a first time landlord. We can offer straightforward guidance on how to best approach your mortgage application, as well as helping you to find the right deal for your circumstances.
Here at Assured FG, we have access to a broad selection of Buy to Let Mortgage deals across the high street and independent mortgage market. This allows us to find the product that can offer you the greatest benefits and allow you to achieve a profitable investment.
Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.