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A Guide to Buy To Let Mortgages
A Buy to Let (BTL) mortgage is for anyone who wants to purchase property to rent it out. You must ensure you understand the risks of investing in property before you consider looking to let a property out.
It is important to have a good credit record. There is also a limit on how old you can be to obtain this type of mortgage. Lenders have upper age limits, typically between 70 and 75.
How do Buy to Let Mortgages work?
Buy to Let Mortgages are similar to standard residential mortgages but there are a few differences:
- Interest rates tend to be higher
- Fees are typically higher
- The minimum deposit is larger, usually 25% of the property’s value
- Most Buy to Let mortgages are interest-only, this means that you will only be paying off the interest each month rather than the original loan amount. The amount borrowed will be due at the end of the mortgage term
- Most Buy to Let mortgage lending is not regulated by the Financial Conduct Authority (FCA).
It is worth mentioning that Mortgage Brokers who can advise and arrange Buy to Let mortgages are regulated by the FCA. Use an expert mortgage adviser if you aren’t sure on the right option for you.
How much can you borrow?
The amount that you can borrow will depend upon how much rental income you expect to receive. Lenders will typically need rental income to be 25-30% higher than your mortgage payment.
You will also need to ensure you have good credit as this will affect the amount you can borrow too.
Don’t rely on your rental
You need to make sure you understand that there will be times you will have a vacant property. This means that you will have no rent coming in but mortgage repayments still to make. You must make sure you have a capital cushion prepared for times this till inevitably happen.
You cannot assume that you will be able to sell the rental property in order to pay off the mortgage. Property prices are changing all of the time and equity can fall into the negative quicker than you would think.
It would be a gamble to rely on your rental and could cause you problems with your own home. If you miss payments on your Buy to Let mortgage it could affect your personal residential property.
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Tax Implications
Capital Gains Tax
If you are a basic rate taxpayer, Capital Gains Tax (CGT) is charged at 18% and if you pay additional rates then it will be 28%. If you decide to sell your Buy to Let property for profit you will usually pay CGT if your gain is higher than the annual threshold of £24,000 in that current tax year.
You can reduce your CGT bill by offsetting costs by deducting them from your capital gain. For example, you could offset Solicitor and Estate Agent fees or any fees for removal of furniture from the rental. You must declare gains made from selling your property on your tax assessment forms.
Income Tax
Whatever rent from whatever property you have as an incoming will be liable for income tax. This will have to be declared on your self-assessment tax return for the tax year that it was earned in.
This can be taxed at 20%, 40% or 45% depending on your income tax band. You can offset these costs against certain allowable costs such as estate agents or council tax fees.
How a Mortgage Broker can help?
A Choice Mortgage Broker understands every aspect of the mortgage market and keeps up to date with its ever changing nature. It is important to know the current market especially if you are looking to invest in property. Mortgage Brokers can ensure you are accessing the right mortgage deals for you.
Buy to Let mortgage lenders typically are not registered by the Financial Conduct Authority so it is even more important to make sure that you are getting everything that you should be and that it is all legitimate. A Mortgage Broker can help with the paperwork and ensure that you understand what you are committing to.
A Mortgage Broker can offer one to one personal advice which is catered to you. They will take into account all of the values, budgets, costs and needs that you have in mind and clear the way to the right mortgage for you.
A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The FCA do not regulate most forms of Buy to Let mortgages.
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