BUY-TO-LET MORTGAGE

BUY-TO-LET MORTGAGE GUIDE

Whether you’re planning on joining the buy-to-let market for the first time, or you’re an experienced landlord looking to expand your portfolio, you need to know you’re making the right mortgage decision. We have a wide range of buy-to-let mortgages and expert advisors who are highly experienced in the sector to guide you through every step. In this section:

• What is a buy-to-let mortgage?
• Who can get a buy-to-let mortgage?
• How much you can you borrow for buy-to-let mortgages?
• How do buy-to-let mortgages work?
• How much deposit do I need for a buy-to-let mortgage?
• Should I plan for times when there’s no rent coming in?
• Can I rely on selling the property to repay the mortgage?
• Are there tax implications to a buy-to-let mortgage? What Capital Gains Tax rates will I have to pay?
• Will I need to take rent into account in my income tax self-assessment?
• What are the rules around Mortgage Interest Tax Relief?
• What are the affordability rules for landlords?
• What is a ‘portfolio’ landlord and can it affect the buy-to-let mortgage decision?

What is a buy-to-let mortgage?

Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:

• The fees tend to be much higher;
• Interest rates on buy-to-let mortgages are usually higher;
• The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%);
• Most buy-to-let mortgages are interest-only. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full. Buy-to-let mortgages are also available on a repayment basis; and
• Most buy-to-let mortgage lending is not regulated by the Financial Conduct Authority. There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy-to-let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.

Who can get a buy-to-let mortgage?

You can get a buy-to-let mortgage if:

• You want to invest in houses or flats;
• You can afford to take and understand the risks of investing in property;
• You already own your own home, whether outright or with an outstanding mortgage;
• You have a good credit record and aren’t stretched too much on your other borrowings, for example, credit cards;
• You earn £25,000+ a year. If you earn less than this you might struggle to get a lender to approve your buy-to-let mortgage; or
• You’re under a certain age. Lenders have upper age limits, typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you’re 45 when you take out a 25-year mortgage it will finish when you’re 70.

How much you can you borrow for buy-to-let mortgages?

The maximum you can borrow is linked to the amount of rental income you can reasonable expect to receive. Lenders typically need the rental income to be 25–30% higher than your mortgage payment. To find out what your rent might be, take the time to do some market research – talk to local letting agents, or check the local press and online to find out how much similar properties are rented for in the area.  

How do buy-to-let mortgages work?

The vast majority of buy-to-let mortgages are provided on an interest-only basis. This means that, for each month of the mortgage term, you’ll only pay the interest on the loan, and none of the capital. While this can be good news in the short term as your outgoings will be less each month, it’s imperative that you have a plan in place to either pay off the full loan or refinance at the end of your mortgage term.  

How much deposit do I need for a buy-to-let mortgage?

To get a mortgage on an investment property, you’ll usually need a deposit of at least 20-25% of the value of the home – as with standard residential mortgages, the bigger the deposit you put down, the better the rate you’ll be able to get. The very best buy-to-let deals are usually only available to investors with deposits of 40% and above. When assessing your affordability, lenders will generally consider your current portfolio and any previous history of obtaining and paying off buy-to-let finance.  

Should I plan for times when there’s no rent coming in?

Unfortunately, you can’t assume that your property will always have tenants, and you need to plan for those potential downtimes in income – something you’ll be familiar with as a contractor anyway. There will almost certainly be times when the property is unoccupied – even if it’s just between tenants – or rent isn’t paid and you’ll need to have a financial cushion to meet your mortgage payments. When you do have rent coming in, use some of it to top up your savings account. You might also need savings for major repair bills.  

Can I rely on selling the property to repay the mortgage?

Unless you have never owned a property, Stamp Duty Land Tax (SDLT) for buy-to-let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000. So no, don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage. If house prices fall, you might not be able to sell for as much as you had hoped, and you’ll be left to make up the difference on the mortgage. Always try to make sure you’ve got enough financial wiggle-room to be able to pay your mortgage.  

Are there tax implications to a buy-to-let mortgage? What Capital Gains Tax rates will I have to pay?

If you’re a basic rate taxpayer, Capital Gains Tax (CGT) on buy to let second property’s is charged at 18%. If you’re a higher or additional rate taxpayer, it’s charged at 28%. With other assets, the basic-rate of CGT is 10%, and the higher-rate is 20%. If you sell your buy-to-let property for profit, you will usually pay CGT if your gain is higher than the annual threshold of £12,000 (for the 2020/21 tax year). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,000 (2020/21) to be made in the current tax year. You can reduce your CGT bill by offsetting costs like Stamp Duty, Solicitor and Estate agent fees or losses made on a sale of a buy to let property in a previous tax year by deducting these from any capital gain. Any gain from the sale of your property, should be declared on your Self-Assessment tax return for that tax year and will be included when working out your tax status for the year which push you into a higher bracket.  

Will I need to take rent into account in my income tax self-assessment?

Yes, the income you receive as rent is liable for income tax which should be declared on your self-assessment tax return for the tax year it was earned in. Depending on your income band, the extra income from rent could be taxed at 20%, 40% or 45%. However, you can offset your rental income against certain allowable expenses, for example, letting agent fees, property maintenance and Council Tax.  

What are the rules around Mortgage Interest Tax Relief?

The rules around mortgage interest tax relief are changing, meaning that relief for finance costs on residential properties will be restricted to the basic rate of income tax. Finance costs includes mortgage interest, interest on loans to buy furnishings, and any fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan. Previously, you were able to deduct all of this interest on your mortgage from your rental income before tax was paid. However, the amount of your interest payments you’re able to deduct is being reduced by 25% a year until 2020 and being replaced by a 20% tax credit for the entire amount.  

What are the affordability rules for landlords?

There are plenty of enticing mortgage offers out there for landlords, but you’ll need to prepare yourself for strict affordability tests. In recent years, the Bank of England (BoE) has looked to cool what it considered to be an overheating buy-to-let market by imposing tougher lending restrictions. As part of their affordability assessments, lenders use Interest Cover Ratios (ICRs) to calculate how much profit a landlord is likely to make. A lender’s ICR is the ratio to which a property’s rental income must cover the landlord’s mortgage payments, tested at a representative interest rate (most banks currently use 5.5%). Lenders are required to test at 125%, meaning the projected rental income must be at least 125% of the landlord’s mortgage payments, but many impose higher levels of around 145%.  

What is a ‘portfolio’ landlord and can it affect the buy-to-let mortgage decision?

Professional landlords with four or more properties are often described as ‘portfolio landlords’.  This is an important distinction, as rules introduced by the BoE’s Prudential Regulation Authority in October 2017 made it harder for these investors to access additional finance. Previously, portfolio landlords could provide their overall profit/loss figures when applying to borrow more money or remortgage a home in their portfolio, but this has now changed. Instead, you’ll now need to show mortgage details, cash flow projections ,and business models for every property you own when applying for finance. If you have a heavily mortgaged portfolio, you may find that these regulations make it more difficult for you to obtain extra funds. Portfolio landlords also face some other restrictions, which are set from lender to lender. For example, some lenders will set a maximum number of properties you’re allowed to have in your portfolio (up to 10 being the most common) and others use different ICRs and representative interest rates depending on how many properties you have. Other rules imposed by individual lenders include limits on maximum Loan To Value (LTV) ratios across a portfolio (for example, your overall portfolio must be at 65% LTV or lower) or the stipulation that the ICR from every property in your portfolio must be above 100%.