What should you consider when you purchase a Buy to Let as a Self-Employed applicant?
With the rise in popularity of rental properties and the growing number of Self-Employed workers in the UK, the mortgage industry has acknowledged Self-Employed mortgage applicants. There are specialist lenders who offer mortgages exclusively to Self-Employed applicants, so it’s perfectly possible to obtain a mortgage as a Self Employed person, as long as you can prove a stable income
The good news is, Buy to Let mortgages are less focussed on personal income, given that the loan is based predominantly on the potential rental yield (income) of the property. This means that there can be more flexibility in the application process and that Self-Employed applicants will be able to find a competitive Buy to Let mortgage with the right lender.
This means that your considerations will be mostly the same, whether or not you are Self-Employed. The following are sensible considerations to make prior to your application:
- What type of tenants or property will maximise your income potential
- Landlord protection policies will help throughout period of vacancy
- Will your rental property achieve 125-145% of your mortgage repayments – this is what lenders will be looking for
- Can you raise 25% deposit
What are the features of a Buy to Let mortgage?
Buy to Let mortgages are used exclusively for the purchase of rental properties, which are predominantly investment properties. This means that they will not be regulated by the Financial Conduct Authority unless the property has been purchased only for the purpose to rent to close family members.
In terms of the repayment type, Buy to Let mortgages are predominantly Interest-only, with many landlords choosing to sell the rental property at the end of the mortgage term in order to repay the final lump sum.
Historically, the arrangement fees and interest rates have been higher than on other mortgage types, however, the price gap is closing, as Buy to Let property purchase increases in popularity in the UK.
As the owner of a property purchased with a Buy to Let mortgage, you will not be able to live at the property for any reason, even throughout renovating.
Whether or not you are Self-Employed, the acceptance criteria for Buy to Let mortgages are slightly different from a standard residential mortgage, although not exact these are some of the requirements of some (but not all) lenders:
- ideally be a homeowner / have a mortgage already
- some lenders have a minimum personal income requirement of £25,000
- be able to repay the mortgage before reaching the age of seventy (some providers will go to an older age)
- have a strong credit score (but specialist providers may help clients with adverse credit histories)
- some lenders prefer prior landlord experience
Buy to Let as an individual or through a Limited Company?
A Special Purpose Vehicle (SPV) is a Limited Liability company that is set up specifically to purchase investment properties. This method of purchase has it’s benefits and weaknesses, and whether this is the right option for you will depend on your personal circumstances.
It’s important to seek out professional tax advice about whether you will benefit more from buying as an individual or through a Limited Company, before you consider setting up a Special Purpose Vehicle.
How will your income be assessed if you’re Self-Employed?
As the loan is not based upon your income, your income will be assessed mainly to ensure that you can afford the mortgage repayments throughout periods of property vacancy. There will probably be more flexibility in terms of the proof you provide, compared to a Standard Residential Mortgage, although the same documents are likely to be needed as proof of a stable income:
- Two to three years of accounts signed off by a qualified accountant
- SA302 forms
- HMRC tax overview
- Business bank statements, if applicable
What is Top Slicing?
Top Slicing is a process whereby Mortgage Lenders use some of the applicants personal income to top up any shortfall in rent. E.g. if the property wasn’t quite meeting criteria in terms of the rental income, but the applicant had a substantial enough income then they would use some of the personal income to cover the shortfall on the Buy to Let mortgage amount.
What are the tax benefits/implications?
- Income tax is due on rental income
- Capital gains tax and income tax are due on any profits of sale
- 3% additional Stamp Duty is payable on each property you own, over and above your own home, worth over £40,000
- Basic rate taxpayers may be able to claim relief on their tax returns for property repairs, letting agency fees and council tax etc
How can What Life & Mortgages help?
Here at What Life & Mortgages, we have helped many Self-Employed people and business owners to build up their rental property portfolio. Whether you’re an experienced landlord or this is your first time, we can help you to maximise your income potential by finding you the most suitable and competitive Buy to Let mortgage for your individual circumstances.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.