Buy To Let
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Buy to Let Mortgages – a quick guide
If you are planning to buy a property and rent it out to tenants, you will need a Buy to Let mortgage. There are a few things that work differently with this kind of mortgage, and some important things to consider.
How do Buy to Let mortgages work?
Letting a property to tenants under a normal residential mortgage is usually a breach of contract; you need a Buy to Let mortgage to rent out a house or flat. In some cases, you can convert a standard mortgage, for example if you’re moving away and want to let out your home.
In general Buy to Let mortgages require higher deposits than residential loans, and you can expect to pay more interest.
Who can get a Buy to Let mortgage?
You will normally need to already own a home to get a Buy to Let mortgage, and you will need around a 25% deposit to get the lowest interest rates. It’s also easier to get a BTL mortgage if you have a good credit history.
There tends to be an upper age limit on a mortgage – you will need to be under 75 at the end of the mortgage term.
How much can you borrow on a Buy to Let mortgage?
While a residential mortgage loan is based on your income, with a Buy to Let mortgage the lender is more interested in the monthly rent the property will generate. But the lender will also want to see that you have another source of income – not just the rental profit.
For most mortgage deals the rent will need to cover 125% of the monthly mortgage payment – or more. Use a mortgage calculator to explore the figures and work out the rental income you will need to generate.
Choosing a rental property and setting the rent
To be a successful landlord you need to keep your property occupied and make a good profit on the rent. But if you set the rent too high for the type of property or the location, you will find it difficult to attract tenants.
The quality of fixtures and fittings is important too. Make sure you do plenty of research on the rental market in your chosen area before you commit to a Buy to Let mortgage.
What happens when there’s a gap between tenants?
Make sure you have a contingency fund, as there are always unexpected costs when you’re renting property.
For example, there are likely to be times when your property isn’t occupied. A tenant might leave, and it takes a few weeks to find a new one. Obviously you won’t receive rental income while the property is vacant – but you still need to pay the mortgage.
You will also need to set money aside for rental costs like maintenance, repairs, annual gas safety checks, letting agent fees and advertising. You will also need landlord’s insurance, which is similar to home insurance.
Interest only or Repayment mortgage?
Most Buy to Let mortgages are interest only loans, where your monthly payment only pays the interest. It doesn’t decrease the overall debt, so you will need to repay the full loan amount at the end of the term.
Interest only Buy to Let mortgages have lower monthly payments, so you make more profit from the rent. If you choose this kind of mortgage, you must establish a plan on how to pay back the loan. It’s very risky to assume that you can sell the property to settle the debt, as property values go down as well as up.
Fixed rate and variable rate Buy to Let mortgage deals are also available, and will mean that your tenants’ rent slowly pays off your loan.
Buy to Let mortgages and tax
Buy-to-let stamp duty rates are tiered according to house price, and you pay more stamp duty on a Buy to Let than a residential property. Use the government’s stamp duty calculator to see how much you will need to pay.
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Income tax is payable on the profit you make from your rental property, by doing an annual self-assessment. Many landlords appoint an accountant to manage their tax responsibilities.
How can Fancy a Mortgage help with Buy to Let?
Many Buy to Let lenders will only sell their products through mortgage brokers, so it really helps to seek advice from a Mortgage Broker
At Fancy a Mortgage we regularly work with both first-timers and portfolio landlords to find the most suitable Buy to Let mortgage options. We are fully registered in England for financial advice and guidance.
Buy to Let mortgages are not regulated by the Financial Conduct Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.