Buy to let mortgages
We've gathered plenty of useful information about buy to let mortgages, including what they are, how you can apply for them, and the costs associated with this particular form of lending.
What is a buy to let mortgage?
A buy to let mortgage is a home loan designed for properties that you plan to rent out. Sometimes, they are referred to as 'BTL mortgages', or landlord mortgages. They work by providing you with a loan to enable the purchase of a property which is let to tenants, or to allow the refinancing an existing property that you rent out. Buy to let mortgages are not suitable for funding the purchase of a property the borrower themselves intends to live in.
How are buy to let mortgages different to regular mortgages?
Buy to let mortgages are classed as a business transaction, so the rates for buy to let mortgages are often higher than those associated with a standard residential mortgage. However, the process is largely the same; borrowers can still choose from interest-only and repayment solutions, and pick from a range of options depending on how long they want to take out the loan.
While some lenders may stipulate minimum earning levels, there is less emphasis on your income in determining whether or not you are eligible for a buy to let mortgage. The ratio of the market rental value of the prospective property against your monthly mortgage repayment costs is a bigger influence on the success of your application.
How much deposit will I need?
Costs involved in buy to let mortgages are generally higher than for residential mortgages and deposits are no exception. On a buy to let mortgage, the minimum deposit is usually 25% of the property value, as many lenders offer a maximum LTV of 75%. However, some lenders will offer deals with a 20% deposit, so it is worth looking around.
Typically, the lowest deposit requirements are only offered to those with exemplary credit records, high earnings, or high levels of equity in other assets which can be used to secure any risk factor regarding void periods in the rental.
How much can I borrow with a buy to let mortgage?
As a general rule, mortgage lenders will seek to validate that the monthly rental value of the property you are looking to purchase is at least 125% of your prospective mortgage repayment. So if your repayment was £500 per month, your property would need to be able to command at least £625 per month in the current rental market.
Which lenders offer buy to let mortgages?
Buy to let mortgages are offered by all of the major lenders in the market, including banks, building societies, specialist finance houses, credit unions and others. It's up to you to track down the best deal.
How old do I have to be to get a buy to let mortgage?
As with any other mortgage, a buy to let mortgage constitutes a legally binding contractual agreement. You therefore have to be at least 18 years old to take one out. In practice, however, banks are unlikely to lend to people at this age as their credit profiles and earnings will not be suitably developed.
Lenders usually stipulate an upper age limit which applies to the age the borrower will be when the mortgage term ends. This upper age limit differs from lender to lender but is usually set at around 75.
Do I have to own my own home in order to get a buy to let mortgage?
Some lenders insist that a buy to let applicant must already be a UK property owner, with or without a mortgage, in order to be accepted. This effectively rules out first-time buyers from the market with these lenders. However, not all lenders stipulate this requirement. In some circumstances, it is enough to prove that you're capable of paying off the bills associated with your new mortgage with the rental income the property is predicted to generate.
Can I hold a buy to let mortgage with another person?
Just like with a normal mortgage, you are able to apply for and hold a buy to let mortgage jointly with additional parties. However, it's important to note that the other person involved will need to have a credit check and fill out an application.
If the application is successful, keep in mind that the applicants' credit profiles could then affect one another's eligibility for additional financial products in the future.
Are buy to let mortgages expensive?
In most circumstances, buy to let mortgages are more expensive than traditional residential mortgages because they come with interest rates that are higher than most competitive primary residence offers.
Buy to let mortgages can also carry higher fees, such as arrangement fees and the costs of validating the rental market value of the property.
From April 2016, landlords also face extra stamp duty costs on their property purchases. Anyone buying a second home or a buy to let property now needs to pay an extra 3% stamp duty on their purchase.
What other costs are involved with a buy to let?
When you calculate the affordability of a buy to let mortgage and the return you are likely to gain from the venture there are a number of other costs you must consider. These include landlords' insurance, the costs of maintenance and repairs, and if you use an estate agent to manage your letting, their fees for finding tenants and collecting rent.
You will also need to ensure you put money aside to cover the mortgage repayment during void periods - the months when you do not have tenants - although some higher end insurance packages will cover this.
Don't forget the extra stamp duty as well. As of April 2016, landlords are required to pay at least 3% extra stamp duty on buy to let property purchases.
What are the insurance requirements for getting a buy to let mortgage?
Though the tenants of your buy to let property will need to arrange their own contents insurance, you will need buildings insurance in order to have your mortgage application approved. This is in your interest as well as your lender's as it means that most of the unpredictable costs will be covered if there is any major damage to the property, such as a fire or a burst pipe.
Lenders will usually stipulate that you must have a landlord's insurance policy in place as well before the final stage of your mortgage completion and the transfer of funds. A landlord's insurance policy may also offer other cover options, such as public liability insurance, which can help to protect against compensation claims if someone is injured on the property itself.
What if I want to rent out the property I currently live in?
If you have a primary residence mortgage and you decide to rent out the property, you can usually undertake a 'consent to lease' process with your lender. This is alternatively known as 'permission to lease'.
The lender will undertake the same checks as they would with a buy to let application from the outset, including whether the market rental value of the property exceeds your monthly mortgage repayment. The lender may restrict the consent to lease to a finite period of time, such as one or two years. At that point you would be obligated to renegotiate your mortgage as a buy to let.
When you agree a consent to lease the mortgage lender will usually either increase your interest rate or charge you a flat fee, which can often run into the thousands.
Not all lenders allow primary residence mortgages to be converted to buy to lets so it's something to discuss with your existing lender if you're considering this.
What restrictions should I look out for?
Different lenders place different restrictions on buy to let mortgage applications. A common stipulation is the type of tenants that are eligible. For example, some lenders will state in their terms and conditions that you are unable to let to students or people who are reliant on social security. Some lenders may also obligate minimum or maximum rental term lengths.
Can I have more than one buy to let mortgage?
It is possible to hold multiple buy to let mortgages, either with the same or different lenders. The affordability proposition is primarily worked out on the individual property and the mortgage connected to it. However, if your first buy to let runs at a financial loss to you for any reason this can negatively affect your chance of being accepted for the second.
While multiple buy to let mortgages are an option, keep in mind that not all lenders will approve them and some may restrict the number of buy to lets you hold with that particular organisation, or collectively across multiple organisations.
What are the tax implications for buy to let mortgages?
Profits you make by renting out property are subject to tax as with most other earnings, and will contribute to your tax bracket calculation. In 2015, a new tax change was introduced that removed a landlord's ability to deduct the cost of their mortgage interest from their rental income when calculating the profit on which they pay tax.
The income tax on your buy to let property will be charged according to your income tax banding (20% for basic taxpayers, 40% for higher rate, and 45% for additional rate). Allowable expenses include property maintenance and repairs (to a certain extent), council tax fees, legal management fees, and building insurance premiums.
You will also be expected to pay Capital Gains Tax on buy to let property if you sell the property for more than you paid for it after deducting costs like solicitor or estate agent fees, and stamp duty.