Updated: 17/09/2024
What is a Buy To Let Mortgage?
Those who wish to become involved in letting will be those who wish to borrow money through a Buy To Let Mortgage. This will be to purchase a Residential Property with a view to renting it to someone else as an investment.
The ‘Borrowers’ would hope to make a profit from a combination of rising house prices and regular rental payments from the Tenants.
This money would then be intended to provide a surplus sum after the Buy To Let Mortgage payments, management, and maintenance costs are covered. It should be noted that many lenders will not consider Buy To Let Mortgages for first-time buyers and those that do not own their own homes.
However, there are still some lenders that may be willing to do so.
(Please be aware that a Buy To Let Mortgage is the same as any normal mortgage in that borrowers are jointly and severally liable).
1. Are There Higher Fees for a Buy To Let Mortgage?
Generally, with a Buy To Let Mortgage, the lender will see it as a high risk and will require a larger than normal deposit when applying for the mortgage loan. Normally, many lenders stipulate at least a 25% deposit that relates to at least the total value of the property they wish to purchase. The lesser deposit usually results in higher payments, and there are some lenders that will loan money with a lower deposit.
The best and lowest rates will usually be available to those who have a larger deposit, of say 40%.
Another cost to factor in is that Arrangement fees may also be higher, 3.5% of the property’s value is not uncommon.
2. Is This Type of Mortgage Interest Only?
You will find when carrying out your mortgage research that the majority of Buy To Let Mortgages are in fact interest-only.
Compare this to a Residential Mortgage, and they are in essence usually capital and interest loans.
What this means, is that a borrower will only pay a monthly interest payment and not a repayment on the loan that is outstanding.
The advantage of this is that the monthly payments on this type of mortgage will be lower, therefore making it more profitable.
That said, the borrower should be aware that this will have to be repaid in full at the end of the mortgage loan term.
3. How is this achieved?
Well, many borrowers will simply put the property up for sale with the intention of selling it before they have to pay the mortgage off.
The disadvantage of this is whether the property sale will cover the cost of the outstanding loan amount.
So it will be important to think carefully or budget over the years of the loan, so money is available to cover any shortfall.
4. What Are the Considerations of Having a Buy To Let Mortgage?
Well, the interest payments made monthly will certainly depend on a number of factors.
- What will the overall amount of the initial loan applied for be?
- What will be the overall rental value?
- What is the buyer’s financial situation?
- Another huge factor that comes into the equation will also be the type of loan that will be taken out to make the purchase.
- Will it be a Fixed-Rate Mortgage or a Standard Variable Rate Mortgage, both of which come with their own advantages and disadvantages?
5. What are the Disadvantages of a Buy To Let Mortgage?
- It could be more difficult to obtain a Buy To Let Mortgage as it would obviously be for rental to others.
- Basically, the mortgage is seen as a risk by lenders.
- In the main, because of the difficulties that a Landlord may face with their tenants.
- From issues with rent collection to the way they treat a property that they do not actually own.
- There is also the ongoing problem of keeping the property occupied, which could have an adverse effect on your (The property owner’s) financial budget.
- This is coupled with the ability to pay the outstanding monthly loan fees.
6. How Much Could I Loan for a Buy To Let Property?
The amount very much depends on how much rent you will be able to generate for your property. As most lenders will generally want to see you receive 125% of your monthly interest payments in rental income. In some cases, this may be even higher and as much as 145%.
One way you can estimate a property’s rental is by having a look around the area it is situated and seeing what other rental properties are generating. That said, it should be noted that a lender will normally look to a Surveyor report to show a rental value of a property and will use that as their guide.
An Example to Study
Here is an example of a property whereby the lender has set the rental value to be 125% of your interest repayments.
This means that to achieve their requirement, you will need to charge £750 per calendar month to be on track for their monthly interest repayment of £600.
So, in a nutshell, it means that the more you intend to charge for Rent, the higher the loan you can ask for and will most probably be eligible for.
Please note that all mortgages and including a Buy To Let Mortgage will have a loan-to-value ratio (LTV).
The lender will calculate the size of your loan as a proportion of the total value of the proposed rental property.
If you take the value of the rental property minus the amount being loaned to you.
The remainder will be made up by the required deposit.
As an example, your rental property is valued at £200,000 and your mortgage is £150,000.
The Loan-to-Value Ratio (LTV) is going to be 75% and you would then be required to pay a deposit of £50,000.
An advantage is also to have an income that meets the lender’s criteria, with many having a minimum annual requirement.
7. What Will Happen When the Buy To Let Mortgage Ends?
When the mortgage ends, if it is an Interest-Only mortgage loan, there will still be an outstanding amount that will need to be settled.
One way to settle the loan will be to sell the property, hoping of course that it is worth more than you paid for it, and more so if it covers the debt.
This is a good way for a landlord to make a profit as long as the house retains equity.
8. What is the Best Way to Find a Good Deal?
There are obviously many lenders offering a multitude of Buy To Let Mortgages, which can take a great deal of time to go through and decide upon.
Our Brokers offer an ‘All of Market’ service, which means they are not tied to any one Lender or High street Bank.
9. What Other Costs are Involved with Purchasing a Buy To Let Property
During the planning stages of deciding whether or not to purchase a property for rental purposes, you will need to factor in many other financial considerations.
So, before making an application for a mortgage, look through some of those of importance to your financial planning budget below.
10. Buy to Let Mortgage Advice
Letting Agent Fees
For whatever reason, it might be that using a Letting or Estate Agent to manage your property is one of your requirements.
If so, then you will need to budget for the fees they charge for their services.
These will obviously vary with different Agents, but most will cover carrying out credit checks on tenants on your behalf, writing and having contracts approved and even chasing tenants for unpaid rent.
Health and Safety Inspections and checks on your rental property will be required, as your property must be safe and in good repair with the living standards at a certain level.
The average charges for the ongoing management of your rental property can be between 10% to 17% of the overall monthly rental income.
If you wish to do this yourself but decide on a one-off letting service as a starter the charge would be approximately equivalent to a month’s rent.
Landlord Insurance
This is the general term but is also called Buy-to-Let Insurance and covers the property, its contents, and the Landlord’s liability.
11. Buildings Insurance
Buildings insurance will be something that is a requirement from all mortgage lenders, and this will make sure your property is covered in the event of damage or fire.
Contents insurance
This is not mandatory, but for peace of mind for furnished Lets, it will cover the existing furniture you have in the property, and that will also include your carpets and curtains.
It should be noted though, your Contents insurance does not have to cover the contents belonging to your tenants – As that will be their own responsibility.
12. Landlord liability Cover
An Insurance that will cover you as a Landlord should any of your tenants or any visitor happen to die or become injured on your rental property.
It is not generally compulsory, but some areas of the UK will make it a requirement for you to have landlord liability Cover, especially if you intend to rent to students.
13. Income Tax
It should be noted that all rent received from your tenants will be classed as income by the Inland Revenue, and as such you will need to pay tax on it.
The amount you will need to pay will be decided by your actual tax band.
It is possible to offset some of the tax due by using the rental income against some of the expenses.
It was that you could include most of the Agent Letting fees, Council Tax, and the general maintenance of the rental property against any tax due.
However, the government will probably phase out most of these during upcoming budgets, so it would be wise to discuss with an Accountant.
14. Capital Gains Tax
All Landlords who own property for rental will be obliged to pay Capital Gains Tax should any asset be sold to make a profit.
Sadly, this will apply to a Buy-to-Let property and the rate payable is usually much higher than other assets.
Should you decide to sell a rental property purchased as a Buy-to-Let, and if the profit is above the present government limit, you will certainly pay Capital Gains Tax.
If you are a joint owner with a partner, then you will be able to combine your tax allowances thereby increasing the profit threshold.
All profits made on any property sale must be declared on your Inland Revenue Self-Assessment Tax Return at the end of the tax year appertaining to the sale.
15. Stamp Duty Taxation
This is a tax that is put on any sale involving property or land.
It includes buying any freehold property, a new or existing leasehold, a property purchased through a shared ownership scheme, and any transferred land or property used in exchange for payment.
Regarding Buy To Let properties, basically, if you take on a mortgage or buy a share in a house, then you will have to pay an extra percentage on top of the standard Stamp Duty Tax.
This would be for every purchase that exceeds the present legal rate.
How Can I Check the Current Stamp Duty Taxation Rates?
You can use the HM Revenue and Customs (HMRC) Stamp Duty Land Tax calculator to work out how much tax you will pay.
16. Maintenance Costs
It should be obvious as an owner of a property that it makes you responsible for the cost of any repairs or building costs.
This will not fall upon the Tenants living in your rental property.
The Maintenance Costs will include the fixing of any issues relating to both the heating or water supply and the costs to repair or replace any existing appliances that break down through natural and normal usage.
It will probably amaze you the number of times these types of costs present themselves.
That said, it would be very wise to ensure that you have enough money within your long-term budget to deal with the problems.
17. Missed/ Late Rental Payments
Should you be in the position of owning a Buy To Let property for say 20 years or more, without a doubt it will not have Tenants the whole time.
That means the money will come from your own pocket and it is something to remember.
Also, the same applies if you do have Tenants, but for whatever reason, they miss the Rent payment.
Obviously, again it will need to be covered and it will normally be the Landlord who does this.
A missed mortgage payment or more over a period of time could well result in the repossession of your property.
So please be aware and try and have funds put aside to counter this.
If you need any further information about a Buy To Let Mortgage for a UK Property, please do not hesitate to contact us HERE