What is a Buy-to-Let Mortgage?
A buy-to-let mortgage is a product sold specifically to someone who wants to buy a property as an investment. This usually means that they will rent the flat, house or maisonette they buy to tenants. The income from the rental will usually cover the cost of the monthly mortgage repayments.
Investors usually buy property with the expectation that it will increase in value over time. This means that investors can also make additional money if the value of the property has increased when they come to sell it.
How Do Buy-to-Let Mortgages Work?
Most buy-to-let mortgages are on an interest-only basis. This means that the monthly mortgage repayments will only cover the interest on the loan and will not pay off the capital amount borrowed. The capital of the Buy-to-Let mortgage is usually paid off at the end of the term by selling the property, which may or may not have sufficient value at that time.
Who are Buy-to-Let Mortgages For?
Buy-to-let mortgages are available to anyone who wants to buy a flat or house and rent it out to tenants.
However in order to qualify for a buy-to-let mortgage you usually need to own your own home outright or have an existing residential mortgage on your home. You also need a decent deposit, a good credit rating and a reasonable income.
Buy-to-let mortgages used to have an upper age limit of around 75 years of age, meaning that was the age you had to be when the mortgage term finished, so you needed to be 50 years or younger when you took the mortgage out. Recently it has become possible to find buy-to-let mortgages that allow borrowers to be aged up to 70 when the mortgage term begins.
How Much Deposit Do I Need for a Buy-to-Let Mortgage?
When investing in a buy-to-let property borrowers usually need a bigger deposit than for a residential mortgage. Most lenders look for a deposit of about 25% of the property’s value for a buy-to-let property.
A larger deposit generally means you should be able to secure a better interest rate.
What is the Criteria to be Accepted for a Buy-to-Let Mortgage?
In recent years affordability tests for buy-to-let Mortgages have been tightened up. This means that the criteria can now seem quite stringent.
Many lenders use interest cover ratios (ICRs) as a way to calculate how much profit a prospective landlord might make. ICRs are a way of ensuring the rental will cover the landlord’s mortgage payments.
However most lenders like there to be some leeway so they often ask that the income is at least 125% of the mortgage payments. The percentage will vary depending on your income tax bracket and most lenders will assume an interest rate of around 5% per annum when doing the affordability calculation.
Additionally lenders might ask for the following criteria to be met before granting a buy-to-let mortgage:
- Good credit history
- Decent, steady income
- Good deposit (at least 25% of the property’s value)
They will also take into account your age and whether or not you are based in the UK.
Pros and Cons of Buy-to-Let Mortgages
Buying a rental property can seem like an easy way to make money but there are positives and negatives to consider:
Pros of Buy-to-Let Mortgages
- Property is generally a fairly safe long-term investment.
- If you secure a low buy-to-let mortgage rate then you can cover the mortgage repayments and make a small profit each month.
- You can offset some of the costs against your tax bill.
- You might generate capital growth if the value of the property rises.
Cons of Buy-to-Let Mortgages
- There is no guarantee your property will never stand empty. When you have no tenants you will have to cover the cost of the mortgage yourself.
- The costs connected with buying the property, such as stamp duty.
- The costs connected with maintaining the property, such as buildings insurance.
- The time required to find suitable tenants and manage the property.
- The fees for a buy-to-let mortgage tend to be higher.
- The interest rates for buy-to-let mortgages tend to be less favourable than residential mortgages.
Can I Live in my Buy-to-Let Property?
The short answer is no. Buy-to-let Mortgages are a specific product for landlords. If you decided to live in your own buy-to-let property you would be breaking the terms of your agreement and committing fraud.
Can I Turn my Residential Mortgage into a Buy-to-Let?
Yes. Most residential lenders will consider granting consent to let the property for a good reason.
To have access to a wider variety of buy-to-let mortgage rates it might be a better idea to remortgage. When remortgaging it is a good idea to consult a mortgage advisor to help you find the right product for your particular circumstances.
Can Your First House be a Buy-to-Let?
In theory yes, first-time buyers can get a buy-to-let mortgage. However in general lenders prefer to grant buy-to-let mortgages to people who already own a residential property.
If you are a first-time buyer and hoping to secure a buy-to-let mortgage your options might be severely reduced so do consult with a mortgage advisor to explore all your options first.
Can I get a Buy-to-Let Mortgage on a Holiday Home?
Most lenders require tenants to have an assured shorthold tenancy for a buy-to-let mortgage meaning that the short-term nature of holiday lets do not apply. In general holiday homes require a specialist mortgage.
Technically however, you can get a buy-to-let mortgage on a holiday home. In practice, there are only a handful of lenders in this market but the mortgages are legally buy-to-let mortgages.
Do You Have to Pay Stamp Duty on a Buy-to-Let?
Yes. For buy-to-let properties landlords must pay an additional 3% surcharge on top of Stamp Duty. The surcharge also applies even if the rate of Stamp Duty is zero.
Stamp Duty rates are subject to change so it is always worth checking the latest government advice.
You can check how much Stamp Duty you might need to pay using the government Stamp Duty calculator.
Buy-to-Let and Tax
There are a number of implications for your tax bill on becoming a landlord, some positive and some negative.
Buy-to-Let and Capital Gains Tax
When you sell an investment property you will be liable for Capital Gains Tax (CGT). For those on the basic level of tax then CGT is charged at 18%, but if you are a higher or additional rate tax payer then CGT is charged at 28%.
You will have to pay CGT if when you sell your property you make a gain of more than the annual threshold (which in 2020/21 was £12,000). If you own the property as a couple then you can combine both thresholds, for example you would only pay CGT if you gained more than £24,000.
Solicitor’s fees, stamp duty and estate agents’ fees from the sale of a property in a previous tax year can all be deducted from your capital gain.
Buy-to-let and Income Tax
You must pay income tax on any income you receive in the form of rent and this should be declared each year on your self-assessment tax return.
You can offset certain expenses such as property maintenance and letting agent fees.
Using a Limited Company to Buy-to-Let
Managing a buy-to-let as a Limited Company can have some tax benefits. You can read more about using a limited company for a buy-to-let in our guide here.
Key Things to Consider When Selecting a Buy-to-let Mortgage
- Do you have enough savings to cover the eventuality that you may not always have tenants in the property?
- Do you have sufficient savings to cover unforeseen property maintenance costs?