Jamie Elvin shares his expertise on Buy-to-Let mortgages.
In recent years, buy-to-let mortgage lenders have significantly tightened their criteria, making rental calculations more stringent than ever. As a result, both existing and potential buyers are seeking innovative and alternative approaches to expand or initiate their rental property portfolios.
Our team of experienced buy-to-let mortgage advisers takes a comprehensive view of your financial situation before recommending the most suitable finance solution. This may involve utilising personal income to cover any rental income shortfall necessary for mortgage payments or exploring the option of purchasing properties within a Limited Company structure. As our valued client, we can help unlock new and efficient opportunities in the buy-to-let property market.
To delve into your specific circumstances and discuss your buy-to-let mortgage requirements in more detail, reach out to our expert team of residential mortgage brokers today. We’re here to assist you every step of the way.
What is a Buy-to-Let mortgage and how do they work?
A buy-to-let mortgage is a mortgage for landlords who want to rent out a property. It could be one they already own or one that they’re looking to purchase.
They are a lot like residential mortgages, but with some key differences. The minimum deposit for Buy-to-Let is typically 25% of the property value. This can vary perhaps from 20% to as much as 40%.
The amount you can borrow is predominantly based on the potential rental income of the property, unlike residential mortgages whereby the loan is based on your earned income. Some Buy-to-Let lenders do, however, work on a hybrid model and use a combination of both rental income and surplus income.
The fees and interest rates on a Buy-to-Let mortgage can be higher than on a residential mortgage, but that’s not always the case. Buy-to-Let mortgages are commonly offered on an interest-only basis, so if landlords are looking to generate income from a property this can be a popular option.
What are the differences of buying a Buy-to-Let in personal name or via a limited company?
Limited company Buy-to-Lets have become increasingly popular in recent years, especially since the introduction of tax changes by the government for landlords. Rather than purchasing a property in your individual name, you can do so through a limited company with potential tax benefits.
The main differences between personal buy-to-let and limited company buy-to-let are:
One of the biggest differences between the two is the way they are taxed. With personal buy-to-let, the income received from the property is taxed at the landlord’s marginal income tax rate, whereas with limited company buy-to-let, the income is subject to corporation tax which is currently lower than income tax rates.
Generally, mortgage rates are higher for limited company buy-to-let mortgages compared to personal buy-to-let mortgages due to the increased complexity and risk associated with limited companies.
Eligibility criteria may vary for personal and limited company buy-to-let mortgages. Limited company buy-to-let mortgages may require a minimum number of directors or a specific trading history for the company.
Some lenders may have different lending criteria for personal and limited company buy-to-let mortgages, such as minimum deposit requirements or maximum loan-to-value ratios.
Limited companies are required to maintain more detailed financial records compared to individuals, which can be more time-consuming and require professional help.
Limited companies offer more protection against personal liability compared to personal buy-to-let, where the landlord is personally responsible for any debts or liabilities related to the property.
For more information, check out our guide for Limited company Buy-to-Let’s
Can anyone get a Buy-to-Let mortgage?
Lots of people meet the criteria and requirements, although these will vary and change from lender to lender. As I mentioned, you’ll typically need a minimum deposit of 25%. Some lenders will insist that you own your own home or that you’re not a First-Time Buyer. You may need to have a minimum level of income, which is typically £25,000.
There are plenty of lenders that don’t require you to own your own home or meet minimum income requirements, but having an income or a property will certainly give you more options.
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Whether you’ve just had an offer accepted on a property and you’re ready to go, or you’re simply wondering how much you need to save for a deposit, it’s never too soon to reach out.
How much can you borrow on a Buy-to-Let mortgage?
Generally, the minimum deposit required for a buy-to-let mortgage is 25% of the property’s value. However, the amount you can borrow will also depend on the rental income the property can generate, as lenders typically use rental stress tests to determine the maximum loan amount.
These stress tests ensure that the rental income covers the mortgage payments and some lenders may require a rental income that exceeds the mortgage payments by a certain percentage.
Some lenders offer top-slicing mortgages, which allow you to use your surplus income to boost your borrowing capacity if your rental income is not sufficient to meet the stress test requirements. However, these types of mortgages may have stricter eligibility criteria and higher interest rates.
How much does a Buy-to-Let property cost?
There are several costs involved in buying a buy-to-let property, both at outset and ongoing. Here are some of the key costs to consider:
You will typically need to put down a larger deposit for a buy-to-let property than for a residential property. A typical deposit for a buy-to-let mortgage is around 25% of the property’s value, although some lenders may require more.
Lenders will typically charge arrangement fees, valuation fees, and legal fees when setting up a buy-to-let mortgage. These fees can vary depending on the lender and the type of mortgage.
Stamp Duty Land Tax (SDLT)
SDLT is a tax that is paid on the purchase of properties in England and Northern Ireland. The rates and thresholds for SDLT can vary depending on the value of the property and your personal circumstances.
Try our Stamp Duty Calculator
Solicitor or conveyancing fees
You will need to hire a solicitor or conveyancer to handle the legal aspects of buying a property, such as conducting searches and handling the transfer of ownership. Fees can vary depending on the complexity of the transaction.
Property management fees
If you plan to use a property management company to manage your rental property, you will need to factor in their fees.
Repairs and maintenance
As a landlord, you will be responsible for the upkeep of your rental property. You will need to budget for repairs and maintenance costs, as well as for any void periods where your property is not generating rental income.
Income tax on rental income, capital gains on any profit made on the property and stamp duty land tax on the purchase.
It is important to carefully consider all of these costs when budgeting for a buy-to-let property. A mortgage broker can help you understand the costs involved and find the best buy-to-let mortgage for your needs.
Is it illegal to live in your own Buy-to-Let property?
It is not illegal to live in a buy-to-let property as long as it is done with the permission of the landlord or property owner. However, it is important to check the terms of the tenancy agreement, as some landlords may prohibit tenants from subletting or allowing anyone else to live in the property.
Additionally, it is worth noting that if a landlord has a buy-to-let mortgage on the property, they may have restrictions on who can live there.
Is it possible to get a Buy-to-Let mortgage as a first-time buyer?
Yes, it is possible to get a buy-to-let mortgage first-time buyer, but the criteria for approval may be different than for those who own or have owned a property before. Lenders typically assess buy-to-let mortgages based on the rental income the property is expected to generate, as well as the borrower’s personal financial circumstances and credit history.
As a first-time buyer, you may not have a proven track record of managing a property or generating rental income, so lenders may rely more heavily on your personal affordability and creditworthiness when deciding whether to approve your application.
It’s worth noting that not all lenders offer buy-to-let mortgages to first-time buyers, and those that do may have stricter eligibility criteria or higher interest rates than for experienced property investors.
Should I choose interest only or repayment on a Buy-to-Let mortgage?
Pros of an interest-only buy-to-let mortgage
- Lower monthly payments: Compared to a repayment mortgage, which can increase cash flow for other investments or expenses.
- Potential tax benefits: The interest payments on a buy-to-let mortgage can be offset against rental income for tax purposes.
- Flexibility: Borrowers can choose to make overpayments or lump sum payments to reduce the mortgage balance if desired.
Cons of an interest-only buy-to-let mortgage
- No capital repaid: The borrower is only paying the interest on the mortgage, so the loan amount itself is not decreasing, meaning the borrower will need to have a plan to pay off the loan at the end of the term.
- Total cost: The total cost of the mortgage will be higher in the long run compared to a repayment mortgage.
- Negative equity: The value of the property may not increase enough to cover the mortgage balance at the end of the term, leaving the borrower in negative equity.
- More stringent criteria: Lenders may require a higher deposit or have stricter lending criteria for interest-only mortgages.
How many Buy-to-Let properties can I own? Is there a limit?
In theory, you can own as many as you can afford. But some lenders have restrictions on the number of Buy-to-Let mortgages that you can have, although there’s plenty of lenders that do cater for landlords with substantial portfolios.
With some, there’s no cap on the number of properties you can have. So as long as you’ve got the right lender, then you can have as many as you like or can afford.
How can Strive Mortgages Help with your Buy-to-Let mortgage?
A mortgage broker like Strive Mortgages can help with the buy-to-let process in many ways. Here are a few.
- Finding the right mortgage: A broker can search the market and find the most suitable buy-to-let mortgage deals that match the borrower’s specific requirements.
- Assessing affordability: A broker can help borrowers understand their financial situation, including how much they can afford to borrow and what their monthly repayments will be.
- Providing advice on property investment: Brokers can offer valuable advice on investment properties, including potential rental yields, location, and any other factors that may impact the investment.
- Handling the paperwork: Brokers can help borrowers complete the necessary paperwork and ensure that all the required documents are in order.
- Liaising with lenders: Brokers can communicate with the lender on behalf of the borrower, answering any questions they may have and providing additional information if necessary.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy-to-Let Mortgages.