- How Does a Buy to Let Mortgage Work?
- Who Can Apply for a Buy to Let Mortgage?
- How Much Can I Borrow on a BTL Mortgage?
- Can I Get a Buy to Let Mortgage as a First-Time Buyer?
- What Happens if a Rental Property is Empty and I Can’t Pay the Mortgage?
- Can I Get a Buy to Let Mortgage With Bad Credit?
- How Do I Repay a Buy to Let Mortgage?
- Do Landlords Have to Pay Capital Gains Tax?
Buy-to-let mortgages are designed for landlords to purchase a rental property, so the eligibility rules vary considerably from a regular residential mortgage.
Today the Revolution Brokers team explains the general criteria and what a lender will assess when evaluating your buy-to-let mortgage application.
How Does a Buy to Let Mortgage Work?
Mortgages on rental properties work differently from residential mortgages. Fees are slightly higher, as are interest rates, but you’ll often pay a mortgage on an interest-only basis.
That means you aren’t paying back the capital borrowed but just the interest chargeable on the loan each month.
For landlords, this makes sense because you maximize profits without needing to repay the capital but can remortgage or sell the investment asset at the end of the term to repay the original amount borrowed.
Lenders will typically need a deposit of at least 25%, and commonly up to 40% since the risks associated with rental mortgages are higher.
Who Can Apply for a Buy to Let Mortgage?
Each lender has different policies, but typically if you match all of the following, you’ll find it reasonably easy to secure a competitive offer:
- Intending to invest in a house or flat as a rental property.
- Understanding the risks and responsibilities of becoming a landlord.
- Having a clean credit record without overstretching yourself on debt repayments.
- You own a property already, regardless of whether it is mortgaged.
- Earning at least £25,000 a year (for most lenders).
- Being below 70-75 to comply with the general upper age requirements.
Note that those criteria aren’t set in stone but are a general guide to the types of requirements most UK lenders have for their buy-to-let mortgage products.
How Much Can I Borrow on a BTL Mortgage?
The amount you can borrow is based on the projected rental income. Usually, that rent needs to be a good 25-30% higher than the mortgage payments.
Lenders will look at the anticipated income and then calculate the percentage of that income you’d need to use to keep up with the interest.
If the rental earnings are 125% more than your mortgage interest, you would likely be approved.
For higher or additional rate taxpayers, the percentage used is increased to 145% or 160%.
Can I Get a Buy to Let Mortgage as a First-Time Buyer?
Lenders prefer to see their buy to let applicants with prior experience, but that doesn’t mean you can’t get a BTL mortgage if you haven’t owned a property before.
The trick is to work with an experienced whole-of-market broker such as Revolution.
We can advise which lenders are open to first-time BTL applicants and recommend specialist lenders who offer competitive deals to help you invest in your first property.
Specialist lenders are usually better placed to offer a mortgage to a first-time landlord than a high street bank or mainstream mortgage provider. These lenders typically have strict policies about a minimum number of years of experience.
What Happens if a Rental Property is Empty and I Can’t Pay the Mortgage?
Vacancies are one of the significant challenges for landlords, and it’s safe to assume that there will be times when you are between tenants.
Therefore, it’s essential to have a contingency to ensure you can keep paying the buy to let mortgage interest, even when you don’t have any rental payments coming in.
Most landlords save a proportion of their rent into a contingency account, which is used to pay the interest during vacancies, cover repair bills or act as a savings account available in an emergency.
Can I Get a Buy to Let Mortgage With Bad Credit?
Poor credit scores make it harder to get any mortgage, and the same applies to a buy to let borrowing product.
Just as with first-time investors, it’s crucial to work with a skilled broker. We assess your circumstances, put your credit history into context, and match your application with suitable lenders.
How Do I Repay a Buy to Let Mortgage?
There isn’t always a need to sell the property when you get to the end of the loan term. Most landlords will look at remortgaging onto another BTL mortgage, often at a cheaper rate, and using this to repay their old lender.
You don’t need to sell the property if it’s profitable, and refinancing at the end of each term can be a great way to retain a valuable asset and allow it to keep appreciating as you make the interest payments each month.
However, there is a risk that property prices could fall, and your rental asset might not be worth as much as you hope.
If that happens, you will need to make up the difference – highlighting the advice above to maintain a contingency fund.
It’s also vital to remember that if you own a buy-to-let property and another property (i.e. you’re not a first-time buyer), you will be liable for Stamp Duty when you sell, including the additional 3% levy on second homeowners.
Do Landlords Have to Pay Capital Gains Tax?
Rental property owners pay capital gains tax at a rate of 18% on any profits arising from the sale of an investment property.
Higher or additional rate taxpayers pay a steeper 28% tax, compared to a basic rate of 10% and a higher rate of 20%.
Therefore, you need to factor in taxes if you decide to sell a rental property to take advantage of increases in house prices.
In the 2021/22-tax year, annual income thresholds are £12,300, so any income or profit over that amount becomes taxable. You can combine your allowance with a partner, making a higher profit of £24,600 to remain tax-free.
One option is to reduce your capital gains liability by offsetting some associated costs – such as solicitors fees, estate agent charges, Stamp Duty or losses made on a property sold in the previous tax year.
You can deduct losses or related expenses from the capital gain to reduce your tax burden.