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Mortgages

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You’ll know that choosing the right buy-to-let mortgage – also known as a BTL mortgage – is vital if you are going to make decent investment returns on your rental property in the long term. As a whole of market broker, we’re in a great position to help you find the mortgage you need.

With what is sometimes called a “landlord mortgage” you can let your investment property to residential tenants or as a holiday home. You’ll already know that mortgage lenders and the HMRC see the letting of a buy-to-let property as a business. This leads to a different mortgage appraisal process and tax treatment compared to a residential property.

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How do Buy-to-Let Mortgages Work?

Most borrowers opt for an interest-only mortgage. This helps to keep their monthly repayments as low as possible but does not make any dent into repaying the original capital borrowed. Ordinarily, this would not be advisable but given that in the long term property have always risen the risk is relatively low. Allied to this is the fact that you’ll need a larger deposit than with a residential mortgage.

At the end of the mortgage term, the borrower either remortgages or sells the property to pay off the mortgage. Hopefully, their investment property will also have generated a capital gain. It’s worth mentioning that unlike residential property, and in particular a primary residence, there will be tax to pay on a capital gain.

The tax treatment of rental income, expenses (including mortgage interest) and capital gains are complex and you should always ensure you understand these before investing in a BTL property. If necessary get proper financial advice, especially if you are thinking of setting up a limited company. Also, be aware that the UK’s Financial Conduct Authority (FCA) does not regulate most buy-to-let mortgages. This is because its remit is to protect consumers and a private rental property is deemed to be a business.

Useful BTL Article

 

The Requirements of a BTL Mortgage Lender

Because a buy-to-let mortgage is not the same as a residential mortgage there may be some requirements you’re not used to. You may need to:

  • Provide a larger deposit. The maximum LTV is around 80% meaning a 20% deposit. You may find that to get the best deals you may need to offer a 40% deposit (60% LTV).
  • Demonstrate your rental income is 25%-30% greater than the mortgage payments. You’ll have fallow periods where the property is not occupied as well as other costs to cover.
  • Show that you have in place an assured tenancy agreement for your tenants.
  • Own your own residential property before you are able to become a buy-to-let landlord.
  • Prove you have a job with its own income. i.e. that you are not dependent on your rental property income.
  • Be careful about the type of property you wish to get a mortgage for.

Choosing Your Buy-to-Let Property

When you come to select the property you want to buy for renting out you must do it with care. This is because there are types of property types that lenders are very cautious about. They include:

  • New build flats – lenders often consider that buyers pay a premium for these, and a premium that you might not recover if you had to sell the property quickly. You may be asked to provide a larger deposit than normal. It will depend on geography.
  • Ex-local authority / ex-council properties, though it will depend on the area.
  • High-rise flats. Lenders will set an upper limit.
  • Flats above commercial properties.
  • Holiday homes, unless you can prove that a regular income can be generated and not for just a few months per year.

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Buy-to-Let Interest Rates

Interest rates on buy-to-let mortgages are typically higher than on residential (owner-occupier) mortgages. As you’ll have seen above this stems from the higher risk associated with this type of mortgage.

BTL is basically a business. First, you have to ensure that the monthly rental income covers your mortgage interest costs and any other routine expenses. Second that, at the end of the mortgage, the property’s value can cover the outstanding debt. As the owner, there are plenty of factors within your control but there are also plenty of external factors (including the economy) that could undermine your plans.

If you can offer at least a 40% deposit (60% LTV) then you will get the best rates. At the highest LTV possible (75% to 80%) the rates you will be offered will be proportionately quite a lot higher. And of course, the interest costs will be your largest expense.

As with any mortgage, you can elect to fix your rates for a longer period to help with your budgeting. 5 year fixed rates are readily available.

Lastly don’t forget to factor in arrangement and setup fees. These are built into the “APRC” figure that lenders must quote to help you compare the total costs. Be aware of what happens to your interest rate at the end of a discount period and also any fees you might incur if you wish to exit a mortgage early.

 

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If you’re uncertain which type of credit might suit you or you have a money problem then one of guides may help you. We summarise each type of loan and their pros and cons, and address issues regarding debt and credit ratings.

Buy to Let Mortgage FAQs

BTL Mortgages: things to know before you apply

What's the difference between a BTL mortgage and a residential mortgage?

In simple the terms the former is a business-orientated mortgage and the latter is not. Consequently a buy-to-let is judged to carry more risk which means:

  • interest rates will be higher
  • maximum LTV% will be lower (i.e. you’ll need to offer a larger deposit)

In addition, these mortgages are not considered consumer-orientated and so are not regulated by the FCA. As such a borrower has less protection and must take greater care when entering into a mortgage contract.

What deposit is needed for a buy-to-let mortgage?

You will find that the maximum LTV on a buy-to-let mortgage is no more than 75%-80% compared to 95% on a residential mortgage. This means you’ll need to offer a deposit equal to at least 20% of the value of the property. To secure the lowest interest and best mortgage deals you really need to have a 40% deposit available.

What are the interest rates for a buy-to-let mortgage?

As with an owner-occupier mortgage, you will get better deals if you can offer a higher deposit. And there is the usual mixture of fixed-rate and discount deals you would expect.

However, everything else being equal, you will pay a higher interest rate than for an equivalent residential mortgage. This is due to the higher perceived risk of a BTL mortgage.

Lastly, don’t forget about fees when comparing mortgage deals. Factor them in to ensure you compare the total costs of running the mortgages.

Should I go repayment or interest-only?

Most landlords opt for interest-only mortgages to keep the monthly repayment costs to a minimum. Only you know your rental income and other expenses but you obviously want to make sure you don’t run your rental business at a loss.

If you have been fortunate to be able to offer a large deposit then a repayment mortgage could be viable with repayments based on a smaller amount. However, do make sure you look at the tax implications of this and the interest-only routes as this may also influence your decision.

What happens at the end of my mortgage deal?

There are two alternatives:

  • remortgage onto a new BTL mortgage
  • sell your rental property and repay the outstanding debt
Can I still treat my mortgage payments as a business expense?

The answer to this depends on whether you own your rental property in your name or in the name of a limited company.

In recent years the Government has whittled away at the favourable tax terms offered to private landlords. From April 2020 you are no longer able to charge any of your mortgage expenses against your rental income. Instead, you will receive a “tax credit” based on 20% of your mortgage interest payments.

This is particularly bad news for higher-rate taxpayers or indeed for people who are effectively “forced” into a higher rate tax bracket because of the need to declare the rental income in their tax return.

Meanwhile, a limited company can still expense mortgage interest costs against rental income. But should you incorporate to take advantage of this difference? You should always take advice before doing so because the tax implications could be significant and will certainly be more complex.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT. THE ACTUAL RATE AND FEES CHARGED WILL DEPEND ON YOUR CIRCUMSTANCES. ASK FOR A PERSONALISED ILLUSTRATION.

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Written/Reviewed by: Amanda Gillam