How do Buy to Let Mortgages Work?

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Buy to let mortgages are designed for use by landlords who want to buy a property in order to rent it out. Although the rules for buy to let mortgages are similar to those of a regular mortgage, there are a few key differences. 

In this guide, we’ll talk you through the application process for buy to let mortgages.

Who can get a buy to let mortgage?

There are several criteria that need to be met before a lender will grant a buy to let mortgage. These include:

  • You want to invest in residential properties, houses or flats
  • You understand the risks associated with property investment and can afford to take these risks
  • Many lenders prefer you to own your own property already, some will lend to First Time Buyers, but the number of lenders is limited
  • You have a good credit score and your debt to income ratio is good. There are some lenders who will work with you with adverse credit, but the number of options are limited
  • Some lenders require a minimum income of £25,000, others may have no minimum income requirement
  • You are below a certain age – many lenders have upper age limits that apply when the mortgage ends, normally around 70-75 years of age

How do buy to let mortgages work?

A buy to let mortgage is very similar to a regular mortgage except that the fees and the mortgage rate tend to be greater.

Most buy to let mortgages are interest-only. This means that each month, you only ever pay the interest amount and not the capital amount. At the end of the mortgage term, you will then repay the mortgage in full.

The minimum deposit amount for a buy to let mortgage is likely to be higher than that of a regular mortgage. Typically, deposits of around 25% of the value of the property are required although this can vary.

Most buy to let mortgages held by buy to let landlords are not regulated by the Financial Conduct Authority (FCA). There are a few exceptions to this rule, for example, if you plan on letting out the property to a close family member.

How much can you borrow on a buy to let mortgage?

The amount that you can borrow on your buy to let mortgage is linked to the amount that you expect to receive as your rental income.

Typically, you should be looking for your rental income to be 25-30% higher than your mortgage payment.

A local estate agent may be able to advise you on how much rent you will be able to charge for the property. You can also check local newspapers and property listings sites to see what similar properties rent out for.

Where can you get a buy to let mortgage from?

You can get a buy to let mortgage from many of the big banks and mortgage lenders. Before you decide on where to get your buy to let mortgage, you should speak with a Mortgage Broker.

How can a Mortgage Broker help?

A Mortgage Broker will be able to provide you with all of the advice that you need to be able to make an informed decision about the right buy to let mortgage to take out. This could mean you choose a fixed-rate loan or a standard variable one. Many options will be familiar to you if you have a residential mortgage in place.

A Mortgage Broker will understand all of the options that are open to you with buy- to- let mortgages and will be able to talk you through them in an impartial way. They will also help you to understand the fees that you will need to pay when taking out your mortgage and offer advice about landlord insurance which is more specialised than standard home insurance.

Planning for when there is no rent coming in

Of course, there may be times when you don’t have a tenant in your property. Often, when one tenancy ends, there can be at least a short gap without any tenants. This could be longer if there is little interest in your property.

It is important to plan for this eventuality. While you have rent coming in, use a portion of it to keep your savings account topped up. That way, you will have some money in reserve to cover your mortgage repayments.

Don’t rely on selling a property to repay the mortgage

Don’t assume that you will be able to sell your rental property so that you can repay your mortgage. If there is a drop in house prices, then the value of your property may drop and be lower than you had expected. If this is the case, you’ll be left to make up the mortgage shortfall.

What are the tax implications of buy to let mortgages?

You will need to think about the tax implications of your buy to let mortgage. If you are a basic rate taxpayer, you’ll need to pay capital gains tax on your property at 18%. If you’re a higher rate payer then this will be charged at 28%.

You can reduce your capital gain tax bill by offsetting your stamp duty, solicitors and estate agent fees, or any losses that you have made on the sale of a property in a previous year.

You will also need to pay income tax on the rent that you receive.