A guide to buy-to-let mortgages
Whether you’re looking to establish a multi-property portfolio or planning to buy a single property to provide an alternative income, getting the finance right at the outset will enable you to get the best returns on your investment for years to come.
That’s not as easy as you might think. Buy-to-let taxation and finance has been subject to sweeping changes in recent years, so we’ve put together this guide with some key facts about buy-to-let mortgages, plus some tips on what to look out for.
Things to consider first
The lenders will apply a calculation based on the annual rent for the property and the cost of your mortgage. The rent must easily cover the cost of the mortgage, by between 125% and 145%, depending on the method by which you choose to own the property, i.e. either directly or in a company.
There are also variations on how the assessment is applied, depending on whether you are a higher rate tax payer for example, or whether you choose a fixed or variable rate mortgage, so it’s worth having a conversation with a broker to make sure you find the best method for you.
- How much will I need for a deposit?
You’ll need to save a minimum of 20% of the value of the property you’d like to buy, though your choice of mortgage providers will be thin at this level. To ensure you have more options, we suggest saving 25%.
- Is the Stamp Duty Land Tax the same for my buy-to-let property as it is for the home I live in?
No, if you’re buying an additional property, you’ll need to pay an additional 3% stamp duty on top of the existing rates. Calculate how much Stamp Duty you may have to pay, using our handy Stamp Duty Calculator.
- Are there any other costs I should consider?
You will need to have funds available to pay for the cost of a valuation and legal fees.
For peace of mind, it is also worth considering protecting your property and the income it generates. That includes life cover, as well as buildings and contents insurance and landlord insurance.
Your buy-to-let mortgage
- What are the types of mortgage I can choose from?
You can choose between a capital and interest, also known as a repayment mortgage, or interest only.
The right one for you will depend on your circumstances and goals. An interest only mortgage will enable you to access more of your monthly rental income, because you’ll only be servicing the interest payments. A repayment mortgage will eat up more of your monthly income, but you’ll be building equity in your property as you pay the mortgage off.
The length of your mortgage will depend on your age, though many lenders now allow terms to extend until a borrower reaches age 80.
You’ll also need to decide if you’d like a fixed rate mortgage, where your rate of interest remains static for a period, usually between two and five years, or a tracker mortgage, with the rate moving broadly in tandem with the base rate of the Bank of England. A fixed rate will usually incur higher payments at the outset, but could make the borrower’s rental calculation – as outlined above – more generous.
Some lenders will offer a discounted rate, which is based on a margin below a lenders own standard variable rate. There are few of this style product in the market at present.
- Should I purchase the property in my name, or use another structure such as a limited company or partnership?
You’ll need to consider which model best suits your situation, and will be influenced by a variety of factors including but not limited to the size of your portfolio, your income and your residency status. We’d suggest professional tax advice, because any one of these structures have their own benefits, depending on the borrower.
- I’d like to buy a property to fix up. How will its condition affect my mortgage application?
The high street lenders would need a property to be in a suitable condition to let in order for them to be willing to lend against it. By that we mean at the very least having a functioning kitchen and bathroom. There are alternative lenders that will allow you to take on more comprehensive development projects.
If you're considering a buy-to-let mortgage and want to understand your options, contact us. We'd be delighted to help you.