A buy-to-let mortgage is designed specifically for landlords who buy a property simply to rent it out. They’re similar to residential mortgages but have some basic differences, such as paying a higher deposit and, typically, only repaying the interest on the mortgage during the term of the loan.
• Interest only
Interest only means that you’re only paying the interest on the borrowed money and not repaying the original money that was lent. This keeps the monthly mortgage payments low; however, at the end of the mortgage term, you’ll need to repay the lender the money you’ve borrowed.
This can be done in several ways, either by remortgaging the property using a repayment mortgage, using your existing savings, switching to an equity release product or by selling the property, which is the most popular way. This is something we can discuss in detail, and then decide together which is the best way forward for you and your circumstances.
• Interest rates are higher
In comparison to residential mortgage rates, rates for investment properties tend to be slightly higher. Over the recent years I have seen mortgage rates for landlords gradually decrease, however on average they are higher than standard mortgage rates.
• Personal income VS Rental income
Unlike a tradition residential mortgage, lenders are less concerned about your personal income and focus more on the projected rental income that the property will achieve. I have access to lenders who can offer buy to let mortgages to clients with no minimum income level, some require between £11,000.00 and £25,000.00 as a minimum. Each lender is different, and some will even let you add some of your personal income to the projected rental income in order to borrow a larger mortgage for purchasing a rental property.
• Ongoing expenses to consider – Insurance, void periods, managing agent fees
Purchasing a rental property can be a great investment opportunity, however, being a landlord requires a bit of work. There are also expenses that need to be taken into consideration when becoming a landlord such as; Building insurance for the property, dealing with void periods when a tenant leaves, keeping the property up to date with legislation, gas safety and electrical certificates and all required on an ongoing basis.
The advice I normally give to landlords is to look for a local letting agent who can help you look after your investment for a fee. Letting agents normally charge a percentage of the rental income each month in return for making sure the property is being looked after and is kept up to date with legislation. This allows you to go about your everyday business doing what you do best and the letting agent to do what they do best!
As this type of property purchase is riskier for the lenders, they normally require a larger deposit. Typically, around 25% of the purchase price. However, there are lenders that will allow smaller deposits subject to the property meeting their criteria. As part of the service I offer I research the market and then let you know all the different options available to you.
• Stamp duty
As a result of changes in April 2016 there is now a stamp duty surcharge of 3% added to any property purchase that is classed as either an investment property or a second home. This is something we will discuss as the costs need to be taken into consideration before deciding to purchase a potential investment property. The stamp duty fee cannot be added to the mortgage and since March 2019 the fee must be paid within 14 days of completion of your new property purchase.
• LTD vs Individual
The biggest change in the buy to let market over the last 3 years has been the way in which landlords are taxed on their rental income.
The rate at which you pay tax is based upon your personal income tax rate and ranges from 0% – 45%. As of April 2020, you will be taxed on all your rental income after allowable expenses, this no longer includes monthly mortgage payments. You will then receive a 20% tax credit based on your mortgage payments.
If you are a basic rate taxpayer you won’t be affected by the changes however, if you are a higher rate or additional rate payer then you will notice an increase in your tax liability.
One of the ways landlords are now looking at the situation is by purchasing properties via a limited company rather than in their own personal name. As the limited company owns the property the tax implications are different. I work closely with accountants who can help guide my clients through the pros and cons of each scenario and help them decide which way works best for them.