Buy To Let mortgages, putting you in the know
When you want to buy a residential property to rent out for profit, you will need to apply for a Buy to Let mortgage. Properties with a Buy to Let mortgage in place can not legally be used as your own residence. However, where you already own a residential property and wish to start letting it out to tenants, you can sometimes request to change your mortgage to Buy to Let with your existing lender gaining consent to let the property depending on your terms or remortgage the property onto a new Buy To Let mortgage.
Who can get a Buy to Let Mortgage?
In order to obtain a Buy to Let mortgage, you will ordinarily have to fulfil the following criteria:
- In most cases you will already need to be a homeowner (having an active residential mortgage is fine)
- Some lenders may require you to meet a minimum salary requirement, usually around £25k.
- Most lenders will be looking for a strong credit score
- Lenders usually require a 20% deposit as a minimum.
How does a Buy to Let mortgage differ from a standard residential mortgage?
A Buy to Let mortgage differs from a traditional residential mortgage in a number of ways, beyond the additional acceptance criteria. For example, they tend to have a higher deposit requirement of 20+%.
The application fees and mortgage interest rates are also higher than on a standard residential mortgage. As most Buy to Let mortgages are taken on an interest only basis, the monthly repayments will often be much lower, offering some balance. The lump sum of your loan will then be paid at the end of the mortgage term, often utilising the sale of the property.
It should be noted that some Buy to Let mortgages are not regulated by the Financial Conduct Authority (FCA) unless you buy a property expressly to let it to close family members.
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How much can you borrow on a Buy to Let Mortgage?
Another way that a Buy to Let mortgage differs is in how the lender calculates your loan amount. Unlike other mortgage types, which are based predominantly on affordability, the amount you can borrow is based on your potential rental yield (income from the rental achieved from the property).
This means that lenders will pay close attention to your choice in property, which they will usually be looking to produce a rental yield to cover your monthly mortgage payments, based on a higher stress-tested rate and a lender specific margin. Therefore, the amount you can borrow will be based largely on the rentability of your chosen property.
Planning for when no rent is coming in
A Buy to Let property can be a great way to bring in a stable monthly income. When planning to apply for a mortgage, however, it’s important to consider periods of vacancy. All rental properties will be empty at some stage, whether it’s during renovation or as a result of a slow local market.
As you’ll still need to meet your mortgage repayment whilst your property is vacant, it’s a good idea to look for a high-end rental protection policy. This type of insurance often covers a lack of rental income resulting from a variety of circumstances.
Don’t rely entirely on a property sale to finalise the mortgage
It’s standard practice for landlords to sell their Buy to Let mortgage at the end of the mortgage term, in order to pay off the final lump sum. Whilst this can be profitable in some cases, there are many situations where this is not an option.
Having a backup plan to cover the lump sum in the event of a drop in house prices, for example, could help you find extra funds where the sale amount is too low.
The tax implications and advantages of a Buy to Let Property
There are many tax implications to consider before applying for a Buy to Let mortgage:
- There is a 3% additional stamp duty requirement on Buy to Let properties
- Income tax is payable on rental income
- Both capital gains and income tax are payable on the proceeds of sale when you sell the property.
With regards to the income tax owed, there may be some property associated costs you can offset against your income tax liability, but we would recommend speaking to a qualified accountant or tax adviser for personalised advice on this.
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Are there any differences when you apply for a Buy to Let Mortgage as a Limited Company?
A Buy to Let mortgage is available to both individual landlords and Limited Company owners. In order to apply for a mortgage through a limited company, lenders will usually require that you use a Special Purpose Vehicle.
Special Purpose Vehicles
A Special Purpose Vehicle (SPV) is a type of limited company that is set up specifically for the purpose of buying property. This is easy to set up by both individuals and existing Limited Companies. There are benefits and drawbacks to using a Special Purpose Vehicle:
No limit on the number of properties owned, allowing portfolio landlords better opportunities to expand
- Stress tests are more relaxed, so mortgages can be easier to obtain
- Some lenders will consider personal income alongside potential rental yield in their loan calculation
- Certain tax benefits (see below*)
*There are different tax rules applied to Buy to Let income depending on whether you are trading as an individual landlord or a limited company.It’s worth considering which method of application will be more beneficial to your long term earning ability prior to application. We recommend speaking to a qualified tax professional for further advice.
- They can be more expensive to arrange
- More detailed and complex application process
- Fewer choices of mortgage lender (although this is gaining popularity)
- The director of the Limited Company will need to provide a personal guarantee on the mortgage
How can a Mortgage Broker like Yellow Brick Mortgages help me to find the right Buy to Let mortgage?
Buy to Let mortgages can be obtained from both high street and specialist mortgage lenders, however, choosing the right lender can be difficult and confusing. There are lots of things to consider when taking out this type of mortgage and obtaining the best mortgage deal available is critical to achieving optimal profit from your property.
As well as finding you the most suitable deal available, Yellow Brick Mortgages can save you a lot of time, effort, and disappointment by ensuring you apply to those lenders most likely to accept your application.