This Buy-to-Let Mortgage Guide provides useful information about the buy-to-let market, rental criteria, affordability and everything you need to know about purchasing an investment property and growing your portfolio.
What is a Buy-to-Let?
A buy-to-let property is purchased for the sole purpose of being rented out to tenants, rather than being occupied by the purchaser. Buy-to-let properties are purchased for a variety of reasons, but the intention is generally to generate a rental income or make a capital gain when the property is eventually sold.
Deposit
The majority of lenders require a minimum deposit of 25% for a buy-to-let mortgage. However, some lenders will accept a 20% deposit, provided you meet their lending criteria.
Tenancy
The type of tenant you have can have a significant impact on the mortgage deals available to you and the lenders willing to consider your application. For example, many lenders offer different products for landlords wishing to let properties to students or operate HMOs (Houses in Multiple Occupation).
An HMO (House in Multiple Occupation) is generally defined as a property occupied by two or more unrelated individuals. These are typically shared houses with communal kitchen or bathroom facilities and often include locks on individual bedroom doors.
Stamp Duty
As of 1 April 2016, a 3% Stamp Duty surcharge applies to all buy-to-let properties and second homes.
First-Time Buyers
The majority of lenders view first-time buyers purchasing a buy-to-let property as a higher-risk proposition and are therefore more reluctant to lend. Although this can make obtaining a mortgage more difficult, there are still lenders prepared to consider applications on this basis.
It is also worth bearing in mind that, even if you have previously owned a property but do not currently own one, this may still deter a number of lenders.
Income
Buy-to-let mortgages are primarily assessed using the expected rental income. Generally, the higher the rental income, the more a lender will be prepared to lend.
However, most lenders (with a few exceptions) also require a minimum personal annual income of between £20,000 and £25,000 from employment or self-employment.
Buy-to-Let Deals
Buy-to-let mortgage products are similar to residential mortgages, with lenders offering both fixed and variable rate options.
However, because buy-to-let lending presents additional risk, interest rates are commonly between 1% and 2% higher than equivalent residential mortgage products. As with residential mortgages, the larger your deposit, the better the rates you are likely to receive. A 40% deposit will usually provide access to the most competitive deals.
Buy-to-Let Fees
Mortgage fees are similar to those associated with residential mortgages and may include valuation fees, administration fees and arrangement fees.
Depending on the lender, arrangement fees are often higher than residential mortgage fees and may be charged as a percentage of the total loan amount.
Using a Letting Agent
Owning an investment property has many benefits, but it also comes with responsibilities. Unless the property is occupied, you will still need to make the mortgage payments, and once tenants move in, you are responsible for managing the property.
A letting agent will typically charge a fee or percentage of the monthly rent. In return, they can often find tenants more quickly and manage the property on your behalf, reducing both the workload and stress involved.
If you are interested in this service, please contact the Lettings Team at our sister company, Potter and Ford Ltd, on 01494 778844.
Buy-to-Let Taxation
Recent tax changes have meant that, by 2020, landlords can no longer offset mortgage interest against rental income in the same way as previously.
Previously, landlords could deduct the interest-only element of their mortgage payments, along with certain allowable expenses, before paying tax on their rental income. These changes were introduced gradually:
- 2018/19 – 50% of mortgage interest could be offset.
- 2019/20 – 25% of mortgage interest could be offset.
- From 2020 – Mortgage interest can no longer be offset against rental income.
Instead, landlords receive tax relief of 20% on the mortgage interest paid.
These changes generally have little impact on basic-rate taxpayers but can significantly affect higher-rate taxpayers, whose income may be taxed at 40% while receiving only 20% tax relief on mortgage interest.
Example:
- Property value: £400,000
- 75% LTV mortgage: £300,000
- Annual mortgage interest: £9,000
- Annual rental yield (5%): £20,000
Rental Calculations
As mentioned earlier in this guide, lenders assess affordability based on expected rental income.
Many lenders will lend more if you choose a five-year fixed-rate mortgage or are completing a like-for-like remortgage rather than raising additional capital.
Some of the most generous rental calculations are based on 125% at 5%, while others require up to 145% at 5.5%.
For example, if you have an outstanding mortgage of £300,000 and wish to remortgage onto a five-year fixed deal:
- £300,000 × 5% = £15,000 annual interest
- £15,000 ÷ 12 = £1,250 per month
- £1,250 × 125% = Required monthly rental income of £1,562.50
Portfolio Lending
From 30 September 2017, the Prudential Regulation Authority (PRA) introduced a new definition of a portfolio landlord as someone with four or more mortgaged rental properties.
This resulted in lenders applying stricter rental yield requirements. Some lenders now require all background properties to meet their rental calculations, while others will no longer lend to landlords with four or more mortgaged properties.
Insurance
If you purchase the freehold, buildings insurance may need to be in place from exchange of contracts.
Another important consideration is landlord insurance. Although not compulsory, it can provide valuable protection against accidental damage and loss of rental income.
While it represents an additional expense, tenant damage and rental voids are common enough within the buy-to-let market that many landlords consider this cover worthwhile.
Capital Gains Tax
If you sell your buy-to-let property or second home for more than you originally paid, you may be liable for Capital Gains Tax (CGT).
Various costs, including Stamp Duty, estate agency fees and legal fees, may be deducted when calculating your gain. In addition, an annual CGT allowance of £11,300 (at the time this guide was written) may further reduce the taxable amount.
Any remaining gain may then be taxed at either 18% or 28%, depending on your tax position.
Rental Voids
Most landlords will experience periods when their investment property is unoccupied.
During these rental voids, you will still be responsible for ongoing costs such as mortgage payments and insurance. For this reason, it is important to have sufficient emergency funds available to cover these expenses until a new tenant is found.