Buy to Let Mortgages

Understanding Buy to Let Mortgages: Enhancing Your Knowledge

When you are interested in purchasing a residential property with the intention of renting it out for profit, you will need to apply for a Buy to Let mortgage. It’s important to note that properties financed with a Buy to Let mortgage cannot be used as your own residence. However, if you already own a residential property and wish to begin renting it out to tenants, you can sometimes request to convert your existing mortgage to a Buy to Let mortgage with your current lender’s consent, or you may choose to remortgage the property onto a new Buy to Let mortgage.

Eligibility for a Buy to Let Mortgage To qualify for a Buy to Let mortgage, you typically need to meet the following criteria:

  • In most cases, you should already be a homeowner (having an active residential mortgage is acceptable).
  • Some lenders may require you to have a minimum salary, usually around £25,000.
  • Most lenders will consider your credit score, so having a strong credit history is beneficial.
  • Lenders usually expect a minimum deposit of 20% of the property’s value.

How is a Buy to Let Mortgage Different from a Standard Residential Mortgage? A Buy to Let mortgage differs from a traditional residential mortgage in several ways, in addition to the specific eligibility requirements. For instance, Buy to Let mortgages generally require a higher deposit, usually 20% or more. The application fees and mortgage interest rates are also higher compared to standard residential mortgages. Since most Buy to Let mortgages are interest-only loans, the monthly repayments are often lower, but the entire loan amount is due at the end of the mortgage term, typically through the sale of the property.

It’s important to note that some Buy to Let mortgages are not regulated by the Financial Conduct Authority (FCA), unless the property is purchased explicitly for letting to close family members.

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Loan Amount for a Buy to Let Mortgage The calculation of the loan amount for a Buy to Let mortgage differs from other mortgage types. Instead of primarily considering affordability, lenders focus on the potential rental yield (income generated from renting out the property). Lenders closely assess the property you intend to purchase, aiming for a rental yield that covers your monthly mortgage payments, typically using a higher stress-tested rate and a specific margin set by the lender. Therefore, the amount you can borrow is largely based on the rental potential of the property you choose.

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Preparing for Periods with No Rental Income While a Buy to Let property can provide a steady monthly income, it’s crucial to consider periods when the property may be vacant. All rental properties experience vacancies at some point, whether due to renovations or a slow local market. As you are still obligated to meet your mortgage repayments during these periods, it is wise to consider obtaining a comprehensive rental protection policy. This type of insurance often covers a lack of rental income resulting from various circumstances.

Diversify Financing Options beyond Property Sale It is common for landlords to sell their Buy to Let property at the end of the mortgage term to pay off the final lump sum. While this can be profitable in certain cases, there are situations where selling may not be an ideal option. Having a backup plan to cover the lump sum, especially if house prices decline, can provide additional financial resources when the sale amount is insufficient.

Tax Implications and Advantages of Buy to Let Properties Before applying for a Buy to Let mortgage, it’s crucial to consider the various tax implications, which include:

  • A 3% additional stamp duty requirement on Buy to Let properties.
  • Rental income is subject to income tax.
  • Capital gains and income tax are applicable when selling the property.

Regarding income tax, certain property-related expenses can be offset against your tax liability. However, it is advisable to consult a qualified accountant or tax adviser for personalized advice on this matter.

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Differences in Applying for a Buy to Let Mortgage as a Limited Company Buy to Let mortgages are available to both individual landlords and limited company owners. If you apply for a mortgage through a limited company, lenders usually require the use of a Special Purpose Vehicle (SPV). An SPV is a type of limited company specifically established for property acquisition. Individuals and existing limited companies can easily set up an SPV. There are advantages and disadvantages to using an SPV:

Benefits:

  • No limitation on the number of properties owned, allowing portfolio landlords greater expansion opportunities.
  • More relaxed stress tests, making mortgages easier to obtain.
  • Some lenders consider personal income in addition to potential rental yield when calculating loan amounts.
  • Certain tax benefits exist (see below*).

*Different tax rules apply to Buy to Let income depending on whether you operate as an individual landlord or a limited company. It’s advisable to consider which application method will be more advantageous for your long-term earning potential. We recommend consulting a qualified tax professional for further guidance.

Drawbacks:

  • Arranging a mortgage through an SPV can be more expensive.
  • The application process is more detailed and complex.
  • Limited choices of mortgage lenders (although this option is gaining popularity).
  • The director of the limited company will need to provide a personal guarantee for the mortgage.

How Can Multibroker Assist in Finding the Right Buy to Let Mortgage? Multibroker, as a mortgage broker, can help you find the most suitable Buy to Let mortgage. We work with both high street and specialist mortgage lenders, but selecting the right lender can be challenging and overwhelming. There are numerous factors to consider when acquiring this type of mortgage, and securing the best available deal is crucial for maximizing your property’s profitability. In addition to finding the most suitable mortgage deal, Multibroker can save you time, effort, and potential disappointment by ensuring you apply to lenders most likely to accept your application.

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Our highly experienced Advisers are ready to help you with either buying or remortgaging a home, protecting your property and lifestyle along with saving you time and effort, ensuring you have a competitive deal right for you.

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