Buy to Let Mortgages
Some Key Points about Buy-to-Let Mortgages
The Tax Considerations
As well as having to raise a hefty deposit, another big issue is that property landlords face a more challenging tax environment than they did previously. Since 2016, anyone purchasing a second property will have to pay a further three per cent in stamp duty. So on a £200,000 purchase, a property investor will have to pay £6,000 more than an individual buying a home as well as a minimum £50,000 deposit. Compare this with a pension contribution where the £56,000 will yield a top-up of £11,200 in basic-rate tax relief.
Recent tax changes mean that property landlords now pay tax on revenue-based rental income rather than their profit after paying mortgage interest. Buy-to-let investors also face a higher tax bill on profits when they eventually sell. Capital gains tax rate on residential property is now 28 per cent for higher rate taxpayers and 18 per cent for basic rate taxpayers. The rate is 18 per cent and 10 per cent respectively on other assets. So, you should seek expert financial advice before pursuing property investment.
Managing Your Investment
A buy-to-let investment will require time and effort. Following the lengthy buying process, you will have decisions on whether you renovate and furnish the property. Will you choose to instruct a letting agent to manage it for you? It will save time and effort, but their fees will reduce your profits. If you are willing and able to be an active and hands-on investor, the process is likely to be more rewarding.
In addition, there are many regulatory considerations. These include the requirement for an energy performance certificate and gas and electrical safety checks. Regulation is a huge consideration, and it's in a constant state of flux, with close to 600 laws and obligations that landlords have to adhere to when renting out a property. Possible rental arrears, fallow periods between tenancies, and ongoing maintenance costs are other factors to consider. One significant repair could potentially wipe out the annual profits from your whole portfolio. That's why it's wise to be aware of those risks and plan for them
Rental Income Expectations
Even though increasing house prices have boosted investors' returns in recent years, the long-term attraction for buy-to-let investing comes from the rental income. Any prospective investor must think about the yield of their potential investment before purchasing a buy-to-let property. The rental yield is the yearly percentage return you are likely to make each year on the original purchase price. The UK average gross yield is 5.9 per cent, according to Hamptons, the property market research experts. This return is skewed in favour of northern landlords, where nine out of ten manage greater than five per cent, compared with three out of ten in London.
Since house prices are at their highest levels compared to wages, the chances of repeating that same level of capital growth are slim. That's why the focus on rental returns has become vitally important. Those considering their buy-to-let options should therefore take a long-term view. Property can still be an attractive asset offering steady yields and the potential for capital growth.
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How Does a Buy-to-Let Mortgage Work?
A buy-to-let mortgage is designed for a property that you intend to rent to tenants rather than live in yourself.
The way lenders assess a buy-to-let application can be very different from a standard residential mortgage.
Rental income is an important part of the affordability assessment. Lenders may use an interest coverage calculation comparing expected rental income with mortgage interest costs, and underwriting can also take account of likely future interest rate increases.
Different lenders have different criteria.
That is why finding a suitable buy-to-let mortgage is not simply about spotting the lowest advertised interest rate.
Ian will take the time to understand the property, the expected rental income and your wider plans before helping you explore the mortgage options available.
Are Buy-to-Let Mortgages Interest Only?
Many buy-to-let mortgages are arranged on an interest-only basis.
This means your monthly mortgage payment covers the interest charged rather than gradually repaying the original mortgage balance.
The outstanding capital still needs to be repaid at the end of the mortgage term.
Repayment buy-to-let mortgages are also available, and the right approach will depend on your circumstances and longer-term plans.
Ian can explain the differences clearly and help you consider which type of mortgage may be suitable for you.
How Much Can I Borrow on a Buy-to-Let Mortgage?
With a residential mortgage, your personal income and expenditure are central to the lender's affordability assessment.
Buy-to-let mortgage lenders will commonly look closely at the rent the property is expected to generate.
The Prudential Regulation Authority describes the interest coverage ratio as the relationship between expected monthly rent and mortgage interest payments. Its current framework also requires relevant lenders to consider costs associated with renting a property and tax liabilities when setting their underwriting approach.
Some lenders may also consider personal income as part of their assessment.
The calculation can therefore vary considerably between lenders.
Ian's role is to understand your circumstances and help identify lenders whose criteria may fit your application.
What Costs Should a Buy-to-Let Landlord Consider?
The mortgage is only one part of the cost of investing in a rental property.
Depending on your circumstances, you may need to consider:
Stamp Duty Land Tax.
Mortgage and lender fees.
Valuation or survey costs.
Legal fees.
Buildings insurance.
Letting or management fees.
Repairs and maintenance.
Periods when the property is empty.
Tax on rental income.
In England and Northern Ireland, buying an additional residential property will usually mean higher Stamp Duty Land Tax rates apply. The current additional-property surcharge is normally five percentage points above the standard residential rates.
Tax treatment can also affect the overall return from a rental property. Mortgage finance cost relief for individual residential landlords is restricted under current tax rules, so independent tax advice may be important before making an investment decision.
Ian provides mortgage advice rather than tax advice, but he can make sure the mortgage conversation forms part of the bigger picture.
Buying Your First Buy-to-Let Property
Becoming a landlord for the first time can seem complicated.
You may be hearing advice from estate agents, existing landlords, friends and family.
Some of it may be helpful.
Some of it may relate to somebody else's circumstances rather than yours.
Ian has more than two decades of mortgage experience and has completed thousands of mortgages.
He will explain the mortgage process in straightforward language, answer your questions and help you understand what happens next.
No jargon.
No unnecessary complication.
Just clear mortgage advice based on your circumstances and your property plans.
Already a Landlord?
Your mortgage needs can change as your property portfolio develops.
You may be:
Buying another rental property.
Reviewing an existing buy-to-let mortgage.
Releasing equity.
Considering a limited company purchase.
Changing your longer-term property strategy.
Managing a portfolio of mortgaged properties.
Applications for portfolio landlords can involve a more detailed assessment of existing properties, outstanding mortgages, assets and liabilities, business plans and portfolio cash flow.
Ian can help you work through the mortgage side of your plans and identify the information a lender is likely to require.
Buy-to-Let Mortgage Frequently Asked Questions
Do I need a buy-to-let mortgage to rent out a property?
If you are buying a property specifically to rent to tenants, you will normally need an appropriate buy-to-let mortgage.
If you already have a residential mortgage and want to let your home, speak to a mortgage adviser before doing so. Your existing lender may need to give consent, or a different mortgage arrangement may be required.
How much deposit do I need for a buy-to-let mortgage?
The deposit required will depend on the lender, the property and your circumstances.
Ian can review your situation and explain which mortgage options may be available based on the deposit you have.
Can I get a buy-to-let mortgage as a first-time landlord?
Yes. Some lenders will consider first-time landlords.
The available options will depend on your circumstances, the property and the lender's criteria.
Can I get a buy-to-let mortgage through a limited company?
Limited company buy-to-let mortgages are available.
The mortgage and tax considerations can be different from buying a rental property in your personal name, so appropriate mortgage and independent tax advice can be important.
What is a portfolio landlord?
For the Prudential Regulation Authority's buy-to-let underwriting framework, a borrower with four or more distinct mortgaged buy-to-let properties is treated as a portfolio landlord.
Lenders may require additional information about your existing properties and mortgages.
Can I remortgage a buy-to-let property?
Yes.
You may want to review your mortgage when an existing deal is coming to an end or because your circumstances and property plans have changed.
Is buy-to-let mortgage advice free initially?
Yes. You can book a free initial appointment with Ian to discuss your circumstances and buy-to-let mortgage plans.
Let's Talk About Your Buy-to-Let Mortgage
Whether you are considering your first rental property or already have an established portfolio, Ian will take the time to understand your plans and explain your mortgage options clearly.
Book your free initial appointment today.
Call Free on 0800 310 0051
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Disclaimer
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. There is no charge for a mortgage consultation, quotations or providing an agreement in principle. A fee of £299 is payable on submission of a full mortgage application.
The Mortgage Store (Ian Wilson) limited is authorised and regulated by the Financial Conduct Authority. Financial Services Registered number for The Mortgage Store (Ian Wilson) limited is 784801. The Mortgage Store (Ian Wilson) limited is registered in England and Wales No: 9447172. Registered and trading address is 30 Speight Crescent,Barton Seagrave, Kettering, NN15 6FL.The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. If you contact us by e-mail, we may store your name and address to facilitate communications.
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If you wish to register a complaint, please write to Ian Wilson, The Mortgage Store, 30 Speight Crescent, Barton Seagrave, Kettering, NN15 6FL or telephone 01536 310220. A summary of our internal complaints handling procedures for the reasonable and prompt handling of complaints is available on request. If you cannot settle your complaint with us, you may be entitled to refer it to the Financial Ombudsman Service at www.financial-ombudsman.org.uk or by contacting them on 0800 023 4 567.