What is a Buy-to-Let Mortgage?
The idea of buying property and renting it out seems very lavish. Since property rents have gone up, it is an option many people are considering. But it is not as simple as it sounds because the property value – especially for houses that are bought to let out – is pretty high.
This is where getting a mortgage can provide the initial financial boost for many new and start-up landlords out there.
The different types of mortgage settlements can make such dealings accessible and possible for anyone who is looking for such options.
A buy-to-let mortgage (usually abbreviated as BTL mortgage) is one that you should know about if you are a landlord who is new in the renting market.
A buy-to-let mortgage is a type of mortgage that can be loaned from a bank or any other mortgage broker. The technicalities of such financial matters can get confusing quickly so we have prepared a simple guide for you that will provide comprehensive insights into this topic.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a mortgage settlement that takes place between you and your lender when you buy property to rent out to others rather than using it for personal residence.
This specific type of mortgage is for landlords or others who are looking to enter the renting market.
It will provide you with the initial financial boost to get started. But before making such a financial commitment, it is necessary to understand how the process works, the differences between a buy-to-let and a regular mortgage, who can get it, the benefits and liabilities, and other tax implications.
How does a buy-to-let mortgage work?
You can settle a buy-to-let mortgage with a bank or other lenders. A mortgage broker can also be suitable for you if you are not very familiar with the process.
When you get the loan, you will be required to make a deposit of between 20% to 40% of the property’s value that you choose to let out. Once deposited, interest rates will be settled, and you will be expected to make your mortgage payments monthly.
Most buy-to-let mortgages are interest-only, so that means your monthly mortgage payments will only cover your interest rates, and these payments will not reduce the overall outstanding debt that you owe to your lender.
You will continue to make payments that will probably be covered through your rental income and once you reach the end of your mortgage term, you will be expected to pay off that initial debt.
How is buy-to-let different than a regular mortgage?
Buy-to-let mortgages are quite similar to regular mortgages but there are some differences that we must mention:
The deposits made for a buy-to-let mortgage are larger than regular ones. Lenders request at least 20% of the property value which can go up to 40% as well.
Unlike a traditional mortgage, most lenders only offer interest-only buy-to-let mortgages. This means that your payments will only cover the interest that you have to pay for your mortgage, and will not reduce your overall outstanding debt.
At the end of your mortgage term, you will still be expected to make the full payment of your capital debt.
Can I get a buy-to-let mortgage?
To be able to qualify for a buy-to-let mortgage, there are some criteria that you will need to pass. These criteria are typically set to provide assurance to your lender that you are in a stable financial situation where you will be able to make your monthly payments to your lender.
A few of these criteria are listed below:
- You must be able to understand the implications of investing in property.
- You must have your own personal residence – it could be on a mortgage or personally owned.
- You must earn at least £25,000 or more per year. Usually, lenders have a minimum income limit, so that they can be assured that you can make your monthly payments in case rental income does not come in stably for a while.
- You must have a good record of credit card payments or any other previous loans or mortgages.
- Your age is appropriate for the mortgage settlement. This means that depending on the term of your mortgage, you should not be too old (ideally, not more than 75) when your mortgage term is up. This means that if your mortgage term is about 20 years, then you cannot request a mortgage if you are above 55 years old. The ideal age for such mortgages is between 35-55.
How much can I borrow for a buy-to-let mortgage?
You are probably wondering by now what is the amount of money you can borrow for this type of mortgage. The answer is that it depends on a few factors.
Your lender will probably assess your financial situation before putting a number on the table. Other than this, factors such as your deposit amount and rental income that you will receive will also affect this figure.
Usually, landlords expect their rental income to be higher than their mortgage payment.
This can be an overhead of about 25-30% through your rental income which will allow you to gain profit and transfer some money to your savings account.
This would be helpful when you are at the end of your mortgage term and need to pay off the capital amount.
Factors to consider before getting a buy-to-let mortgage
It is important to mention the liabilities that you might have to face if you choose to get a buy-to-let mortgage. Usually, people plan to use their rental income to make their monthly payments according to the interest rate on the loan.
But that planning has an assumption that you will always have renters to let your property to, which is not always the case.
There are going to be months when you will not be able to find a tenant for your property. In such situations, it is best that you are prepared with another source of financial income that can help you when things aren’t going smoothly.
Another consideration is that your property will not only generate rental income, but it will also cost you some amount. The usual costs of a rental property include tax, insurance for landlords and rent, maintenance and repairs, and other such factors.
You need to include these matters in your planning to understand how much it really costs to rent out the property, and how you will make your payments each month.
One of the biggest considerations to make before getting a buy-to-let mortgage is that you’ll be paying off interest each month, so that means your overall capital will remain the same that you will have to pay off at the end of your term.
Many people consider that they will sell the property at the end of their term and will use the money to pay off debt, but it isn’t as easy as it seems. Property prices fluctuate every year, so it is very common for the house price to actually go lower than the amount you paid for it.
Considering this, it is important that you deposit some amount in your savings account each month to make sure that you are capable of paying off debt without selling your rental property.
All these factors should be weighed in and assessed before making a final decision about getting a buy-to-let mortgage.
What are the tax implications of a buy-to-let mortgage?
First of all, the capital gains tax (CGT) will be applicable to your buy-to-let mortgage. If you have a taxable income of £12,501 to £50,000, then your mortgage will be charged at 18%.
For higher or additional amounts of taxable income between £50,001 to £150,000, a buy-to-let mortgage is charged at 28%. Your CGT cost can be reduced if you decrease your capital gain by incurring other costs such as estate agent fees or stamp duty costs.
Another form of tax that is applicable in this case is income tax for the rent you earn. For basic taxpayers, this rate is at 20%, for a higher rate, it is 40% and for an additional rate where income is over £150,000, this should be 45%. You can also reduce this tax by taking care of maintenance costs for your property.
It is informative to mention here that mortgage interest tax relief has significantly changed as of April 2020, especially for higher rate taxpayers.
Before the tax rule was changed, higher rate taxpayers were able to receive about 40% tax relief by subtracting mortgage expenses from rental income. But now, a tax credit is assigned to your mortgage interest payments of about 20%.
If you are a new landlord in the rental property market, then knowing the basics and technicalities of the buy-to-let mortgage process can be very useful for assessing the possibilities out there.
This information is important so that you can understand the best deals out there that could not only help you right now but could prove beneficial for you in the longer run.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a loan given to a landlord to finance their rental property.
Who can get a buy-to-let mortgage?
Those looking to invest in housing to rent out to others may get a buy-to-let mortgage.
How do buy-to-let mortgages work?
Buy-to-let mortgages work a lot like normal mortgages but the fees and interest rates are higher and you require a larger downpayment.
You’ll need to apply and be approved by a lender to get a buy-to-let mortgage.
How much you can you borrow for buy-to-let mortgages?
Usually you can borrow only up to the amount that makes your monthly payments take up 70-75% of your monthly rental income.
Lenders want to make sure your business can still be profitable while still paying back the loan.