Buy to Let

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You might be looking to buy a property to let out to tenants, or you may already own a home that you’re thinking of letting. Either way, you will need a Buy to Let mortgage, which is different from the standard residential kind.

What is a Buy to Let mortgage?

A Buy to Let mortgage is a loan to buy a property that you will rent out. If you’re letting a residential property that you don’t own outright, you must have a Buy to Let mortgage. Letting under a standard mortgage is a breach of your contract, as it usually states that you must live in the property.

How do Buy to Let mortgages work?

Buy to Let (sometimes referred to as BTL) mortgages work in the same way as residential mortgages – you borrow money to buy a home and pay it back over a long period, e.g. 25 years.

You can choose a repayment mortgage, but interest only deals are more popular. With interest only, monthly payments don’t reduce the overall total of the loan – just the interest. When your mortgage ends, you’ll then need to repay the total borrowed.

People choose interest only because it means they make more monthly profit from their tenants. Interest only payments are lower, so you’ll get a higher income as a landlord. It’s important to have an ‘repayment strategy’ though, to repay the full amount at the end of the term.

How much can I borrow with a Buy to Let mortgage?

Unlike a residential mortgage, the sum you can borrow on a Buy to Let mortgage isn’t based on your income. Instead, it’s based on the rental income you can generate from the property.

Lenders expect the rent to cover the mortgage interest by 125% – and sometimes up to 145%. This is often based on a higher ‘stressed’ interest rate to ensure you can still afford the mortgage if interest rates increase in future. It’s therefore very important to do your research on how much rent the property can generate. Important factors are property size, facilities, quality and residential area.

The more your potential monthly rent, the more a lender will offer you. Using a mortgage calculator is a good way to get a sense of the figures involved.

How much deposit will I need for a Buy to Let mortgage?

To buy a property to let, you will usually need a larger deposit than for a residential mortgage, typically between 20% and 40%. That means the loan to value (LTV) that mortgage lenders are looking for is between 60% and 80%.

What happens at the end of an interest only Buy to Let mortgage?

If you choose an interest-only mortgage it’s crucial to have a robust repayment plan or exit strategy. It’s not enough to simply assume you’ll sell the property at the end of the mortgage term.

The challenge is that house prices can go down as well as up. If the house is worth less than the mortgage value, you will have to pay the difference. It can also take months or even years to sell a property, and it can be challenging to get the timing right.

It’s safer to invest some of the profits from your rental property or make some mortgage payments to reduce the debt, to prepare for the future.

Can I rent out a room and still have a residential mortgage?

Most mortgage contracts allow you to take in a lodger as long as you live in the property. You should always check with your lender first, though. If you’re a leaseholder you might also need permission from the freeholder. You may also need to inform your home insurance provider.

What are the tax implications with owning a Buy to Let?

Running a Buy to Let means you will have to complete an annual tax return via Self-Assessment. Buy to Let is less tax efficient today than it once was. Some experienced landlords set up limited companies to reduce their tax liabilities, especially those in the higher income tax brackets. Whether this will suit you depends on your situation, so it’s important to seek expert advice.

A further tax-related concern is that if you sell your rental property, it will be subject to Capital Gains Tax. You will also be eligible for additional stamp duty: a Buy to Let property costs an additional 3% in duty. It’s important to seek professional financial advice about the tax benefits and implications – and we can help you with that.

How can Rebus help me with my Buy to Let mortgage?

It’s always important to shop around for financial products, and explore whether a fixed rate or a variable rate mortgage is most suitable for you, which tends to be cheaper.

A Rebus mortgage adviser will explore suitable mortgage deals and make recommendations – taking fees, costs (including stamp duty), interest rates and rental income into account. Once we’ve helped you apply for a Buy to Let mortgage we can also advise you on home insurance, landlord insurance and other protection products.

Contact our registered office today for a chat about how we can help you.

The Financial Conduct Authority does not regulate most Buy to Let Mortgages.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

For specialist tax advice, please refer to an accountant or tax specialist

Approved by The Openwork Partnership on 19/09/2023


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