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Buy to Let mortgages explained

If you’re looking at buying a property to rent out for profit, you will need a Buy to Let mortgage. Once you have a Buy to Let mortgage, you will not be able to live in the property yourself. Likewise, properties with a standard residential mortgage must not be offered to let.

Who can get a Buy to Let mortgage?

The criteria to obtain a Buy to Let mortgage is usually more stringent than for a standard residential mortgage and most lenders will be looking for you to satisfy the following:

  • You already have a residential home (mortgaged or owned outright)
  • A minimum salary in the region of £25,000
  • You are at an age that allows you to pay off your mortgage before you’re seventy
  • A strong credit score
  • Some lenders prefer and others insist you have landlord experience

How does a Buy to Let mortgage differ from a standard residential mortgage?

Buy to Let mortgages are generally interest-only mortgages, with higher interest rates than you would expect on a standard residential mortgage. The application fees are also likely to be higher. The maximum Loan to Value amount that is usually achievable is around 75%, meaning that there is a higher deposit requirement of around 25%.

Given the interest-only nature of Buy to Let mortgages, the monthly repayments will be much lower, offering some balance on the other expenses, however, you should bear in mind that your full loan will be due at the end of the mortgage term.

Buy to Let mortgages are not regulated by the Financial Conduct Authority (FCA).

How much can you borrow on a Buy to Let Mortgage?

Another major difference with a Buy to Let mortgage is in the method used to determine your loan amount. Lenders calculate how much you can borrow based on the potential rental yield (income earned from rental from the property).

It’s important to research the rent achievable prior to your application and you should bear in mind that lenders will want you to be able to cover your mortgage payments, plus an additional 25%-45%.

Whilst lenders are likely to do stress checks on your personal income, the most important factor in deciding your loan is profitability.

Planning for periods of vacancy

When planning to purchase a Buy to Let property, it’s important to consider that there will be times when you’re not making a profit. Whether you have periods of vacancy, take it off the market for renovation or even experience difficult residents, having a backup plan for repaying the mortgage is wise.

Some high-end rental protection policies cover you for periods where there’s a lack of rental income. Our Mortgage Brokers will be able to advise you on a suitable policy.

Don’t rely on the property sale to pay off your mortgage

Much like your mortgage repayments, it’s worthwhile considering how you will make your final mortgage payment when financially planning for a Buy to Let purchase.

Many landlords sell their Buy to Let property at the end of the mortgage term, using the proceeds to pay their final lump sum. There are many reasons, however, why this might not be viable. For example, a slow sale or fall in house prices. You should also consider that both income tax and capital gains tax will be payable on any profits when you sell the property.

What are the tax implications of a Buy to Let property

Buy to Let property ownership comes with a range of tax implications that will need careful consideration before you consider whether it’s the right step for you. For example

  • When you purchase an additional property, there is a 3% additional stamp duty requirement
  • Income tax will be due on all rental income you earn from your property(ies). It’s also worth considering whether this would result in you going into a higher tax band and the higher rates associated with this change
  • Capital gains and income tax will be due on the proceeds of sale when you sell the property

Tax relief

You can currently gain tax relief on some aspects of being a landlord, such as; property repairs, council tax and utilities (that you personally pay), letting agency, and property management fees.

How can a Mortgage Broker help me to find the right Buy to Let mortgage?

There are a wide range of Buy to let mortgages available from both high street and specialist mortgage lenders. Using a Vivid Mortgage Broker will ensure that you have access to a wide variety of lenders. We can also advise you of which mortgage deal is most suited to your circumstances and which lender is most likely to accept your offer.

On top of finding you competitive mortgage rates, we can save you a lot of time and effort, as we take the administrative burden out of the application process.

Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.  

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