What is a Buy to Let Mortgage?
A buy to let mortgage is a mortgage taken out on a property you are looking to buy as an investment and to rent out.
How do Buy to Let Mortgages work?
The amount you can borrow on a buy to let mortgage is usually worked out based on the rental income the property can generate, rather than your personal income like a normal residential mortgage.
The calculation used by the lender can vary, depending on many factors such as:
- The loan to value
- Whether the interest rate is fixed and for how long
- How many other properties you own
- What your personal tax rate is.
Some lenders will allow you to use your personal income to “top up” the mortgage calculation if the rental income from the property is not enough for the mortgage you need.
Buy to Let mortgages can be set up on either an interest-only basis or on a repayment basis.
Unlike residential mortgages, interest only is a popular choice and easy to obtain as the property itself can be sold in the future to repay the mortgage.
Who can get a Buy to Let Mortgage?
Most lenders will require you to already be a homeowner to be able to apply for a buy to let mortgage.
If you do not currently own a property, you may still be able to get a buy to let mortgage, but the lender will base the loan amount on your personal income rather than the rental income the property generates.
As with all mortgages, you will need to pass a credit score. There are lenders in the buy to let market that will cater for applicants with credit history issues, but these will typically be more expensive in terms of interest rates and arrangement fees.
The type of property can also be important. If the property is going to be let to multiple tenants (such as a student let for example) this can mean that different rules apply.
There are specialist mortgages available for these types of situations. Your Go 2 Mortgage specialist can help with this.
Limited companies and Buy to Let Mortgages
It is also an option for a limited company to take out a buy to let mortgage to buy a property.
This option has become more popular in recent times, often due to changes in tax law in relation to rental income.If this is something that you are considering, we can help you with the mortgage.
It is vital however, that you seek specialist tax advice from a suitably qualified professional (ie. accountant) to ensure that this option is right for you.
Costs involved in Buy to Let Mortgages
Buy to let mortgages are typically slightly more expensive than normal mortgages, both in terms of interest rates and set up/arrangement fees. You will normally have to pay a valuation fee and solicitors fees, as with any mortgage.
You will need a deposit of at least 20% of the purchase price. As with all mortgages however, the bigger deposit you can put in, the better the mortgage deals become that are available to you.
Stamp Duty Land Tax
One important thing to consider with a buy to let property is Stamp Duty Land Tax (usually just known as Stamp Duty).
There is an extra amount payable when you buy an additional property above the 1st one you own. As the majority of buy to let purchasers will own their own home, this applies to most buy to let purchases.
At the moment, this additional amount is 3% of the purchase price of the property if over £40,000.
This 3% is in addition to any normal Stamp Duty that is payable. You can calculate how much is payable by using the Stamp Duty Land Tax Calculator.
It is also important that you consider the personal tax implications of owning a buy to let property. If you own the property in your personal name, then the rent you receive is classed as taxable income and will need to be declared on your tax return.
We do not offer specific tax advice and it is very important that you do speak to a suitably qualified tax advisor (accountant) who can advise in this area.
Pro’s and con’s of buy to let mortgages
Whilst it can seem to be a very attractive proposition to have a buy to let property, it is not without risk and potential problems.
Pro’s
- Many of our clients use buy to let as a way of topping up their pension provisions and, done well, it can certainly provide an excellent income source.
- It can increase your capital if the property increases in value or if the mortgage is on a repayment basis and the outstanding balance is reducing.
Con’s
- There is no guarantee that the property will increase in value and if there is a reduction in its value, that can erode the capital used for the deposit and may even result in negative equity if the property is worth less than the mortgage outstanding.
- You are responsible for maintaining the payments on the mortgage, even if you do not have a tenant in the property or the tenant does not pay their rent. You are also responsible for the maintenance of the property and need to keep buildings insurance in place.
All in all, buy to let can be a very good investment, but should not be entered into without fully understanding what is required and the costs and risks involved.