Buy to Let Mortgages Explained
How Does a Buy-to-Let Mortgage Work?
Buy-to-let (BTL) mortgages are for landlords who want to buy property to rent it out. There are some important distinctions between the rules around buy-to-let mortgages and regular mortgages, so you need to be clear on what they are if you are considering buying a property in this way.
Who is Eligible for a Buy-to-Let Mortgage?
If you want to take out a buy-to-let mortgage, you must meet the following criteria:
- You are planning to invest in houses or flats
- You can afford to invest in property
- You already own your home, whether outright or with an outstanding mortgage
- You have a good credit record and pass an affordability test
- You earn £25,000 or more per year
- You will be under 70 (sometimes 75, depending on the lender) when the mortgage ends
How Does a Buy-to-Let Mortgage Work?
The key differences with a buy-to-let mortgage are as follows:
- The fees and interest rates are usually much higher than a regular mortgage
- The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although some lenders ask for as much as 40%)
- BTL mortgages are usually interest-only, however they are also available on a repayment basis from some lenders.
- Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA), unless you will be letting the property to a close family member. These are often referred to as a ‘consumer buy–to–let mortgage’
How Much Will I Be Able to Borrow?
The maximum you can borrow is linked to the amount of rental income you expect to receive. Most lenders require the rental income to be 25–30% higher than your mortgage payment, so it’s important to do your research on rental rates for the area and type of property you are considering.
What are the Pitfalls?
There are key things to consider if you’re planning on taking out a buy-to-let mortgage:
- You have to make the mortgage payments regardless of whether you have tenants, so you need to be sure you can cover them if you have times where the property is vacant or unpaid rent
- You will need to maintain the property and pay for buildings insurance. While it can be tempting to use excess rental income to fund your lifestyle, a more sensible approach is to put it into a savings account to cover unexpected expenses
- If house prices fall, you may not be able to rely on selling the property to repay the mortgage at the end of the term. If you’re only paying interest each month, there will be a substantial amount owing
- Capital Gains Tax (CGT) on a buy-to-let second property is charged at 18% (28% for higher and additional-rate taxpayers). If you sell your buy-to-let property for profit, you will liable for CGT if your profit is above the annual threshold, which is £12,000 for the 2019/20 tax year. You are able to offset costs such as Stamp Duty, solicitor and estate agent fees, so consult an accountant to be sure you don’t pay too much CGT
- The income you receive from rent is liable for income tax according to your income–tax band. You can offset this income against certain expenses (e.g. council tax and agent fees), so consult an accountant to make sure you are as tax efficient as possible
- From 2020, mortgage interest tax relief is capped at 20% of the entire amount of finance costs including mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans
As with any financial decision, it can be useful to consult an independent financial advisor or a mortgage advisor to help make the right choices to best suit your circumstances.