Buy to Let Mortgages
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Buy to Let Mortgages
Peter Matthews shares his expertise on Buy to Let mortgages.
What is a Buy to Let mortgage and how do they work?
In simple terms, a Buy to Let mortgage is a loan on a property that is allowed to be rented out rather than lived in by the mortgage holder. They’re normally assessed on the basis of the rent rather than the income of the borrower. That’s the main difference between a Buy to Let and a residential mortgage.
Another fundamental difference between the two is that a business Buy to Let mortgage isn’t regulated by the Financial Conduct Authority, whereas residential mortgages are. You’re therefore provided with more protection under a residential mortgage than a Buy to Let, which is essentially regarded as a commercial transaction.
You could have a personal Buy to Let mortgage or a limited company Buy to Let mortgage – another difference that we’ll come onto later.
Who can get a Buy to Let mortgage – can anyone?
Essentially if you’re over 18 and allowed to borrow, yes. There are many lenders offering different types of Buy to Let, even for First Time Buyers. The rules and the underwriting requirements are different for First Time Buyers, because the lender has to make sure that the loan is for its set purpose – an investment property to be let out, rather than being used by the borrowers as a home or a weekend retreat.
You don’t have to own a property to have a Buy to Let mortgage, but it does help. You can buy as an individual, or a group of people can get together and buy within a partnership. You can also buy through a limited company, which can offer tax savings for some people.
How much can you borrow on a Buy to Let mortgage? What sort of deposit is needed?
Typically, most lenders would look for a 25% deposit, so you would take a 75% loan. They are available at 80% and 85% in exceptional circumstances. But because the amount you can borrow is governed by the rent you receive, in most instances it’s usually 75%.
In low capital value / high rental areas you can sometimes achieve an 80% mortgage but typically you’re looking at a 25% deposit.
How much does a Buy to Let property cost?
The main costs are the purchase price for the property, plus all the ancillaries and solicitor fees to pay. Those would vary whether you’re doing it as an individual, a partnership or a limited company, because of the conveyancing work involved.
There will be a valuation fee for the lender to assess that the property is worth the money and you’re not overpaying for it. They will also need to check that it’s in a suitable condition to be let: they won’t lend on a property that needs heavy refurbishment.
They’re looking at the rent covering the mortgage payment – if it can’t be rented there won’t be any money to cover the mortgage. A lot of people buy properties at auction, refurbish them and let them out for a long-term investment. There are different products available to do that.
Some lenders have a refurbishment Buy to Let product that’s specifically designed as a short-term, high charge loan while you do the work on the property. Then it’s immediately moved onto a long-term Buy to Let mortgage. It doesn’t preclude you from getting a capital gain from purchasing a dilapidated property, but you have to design it in that way.
On a standard Buy to Let property, depending on the product – whether it be a discounted rate or a fixed rate – there may be an arrangement fee as well. The main additional cost will be stamp duty land tax. There is a 3% premium on second properties and the minimum payment threshold is a lot lower.
Is it illegal to rent out a house without a Buy to Let mortgage? Is it illegal to live in your own Buy to Let property?
Illegal is a very strong word, but you’re not allowed to live in a property that you’ve bought with a Buy to Let mortgage. The mortgage is designed for letting. If you move into the property, the lender may ask for immediate repayment of the mortgage. They will have the right to take possession of the property, because you broke the terms and conditions of the mortgage. And while all this is going on, they may charge you a premium interest rate.
Where it would become illegal is if you take a mortgage out on a Buy to Let basis where your intention is to occupy the property – that becomes scheme abuse, which is tantamount to fraud.
If you have a Buy to Let mortgage and for some reason you have to move back into the property, you can seek your lender’s permission to do that. They would reassess your income to prove that you can repay the mortgage and if approved, it would then become a regulated mortgage.
There are circumstances where you might need to let your residential home. Let’s say your company asks you to go and work abroad for two years under a short-term contract. Your whole family is going with you. You don’t want to sell your property, but you want to let it out. If you seek your lender’s permission under a residential mortgage and they grant it, you can let the property without getting a new mortgage – but only with the express consent of the lender.
Speak To an Expert
Our job is to provide you with the expertise and knowledge to find you the most appropriate solution. Whether you’re investing in property or looking to buy your first home, our mortgage advisers can help.
Should I choose interest only or repayments on a Buy to Let mortgage?
This will come down to advice from a tax adviser or accountant. Typically, the majority of Buy to Lets are done on an interest-only basis, because that lowers your monthly commitment to the lender. If there are any voids – the term used when the property isn’t rented in between tenancies etc. – the amount you have to cover is lower.
Another reason to choose interest only is where the repayment mortgage may actually cost you more than the rent you’re receiving. Then, the lender has to assess your income over and above the rent you’d receive, to make sure that you can afford that mortgage.
The best way to reduce the debt you have on an interest only mortgage, whilst keeping your commitments as low as possible, is to utilise the overpayment facility. Most lenders will allow you to pay off between 10% and 20% of the outstanding balance each year, with no redemption penalties. You’re therefore achieving the goal of a repayment mortgage – which is to reduce your debt, but you’ve still got the lower commitment of interest only on a monthly basis.
How many Buy to Let properties can I own – is there a limit?
Again, it depends on the lenders and this is where mortgage brokers will help you. Some lenders will limit the amount of properties that you have with them, others will limit the amount that you are borrowing in total. Other lenders have no limit at all – so there will be a lender out there for you even if you own 50 Buy to Let properties.
At that scale it becomes a commercial activity and you need to employ people to look after them. Most people in the Buy to Let arena are individuals who have one or two properties.
How can a mortgage adviser help if somebody is looking for a Buy to Let mortgage?
Your mortgage broker would be your guide to avoid all the pitfalls when purchasing a Buy to Let property. There are so many imponderables when we come to this. Are you buying a property that needs refurbishment? Which lenders will look at that for you? Does the rent you’ll receive on that property work for the interest cover ratios that lenders are looking for?
A Buy to Let mortgage is assessed on the rental received, worked out on the basis of an ICR – an interest cover ratio. Some lenders will give you an interest cover ratio as a multiplication. Typically for a base rate taxpayer that would be 1.25 times the fixed rate. If you’re taking a variable rate mortgage it could be 1.25 times an interest cover ratio of 8% – so there’s a massive difference in the amount you can borrow on a fixed rate compared with a variable rate. If you’re a higher rate taxpayer that cover ratio could go up to 1.45 times the rate.
If the rent isn’t sufficient, some lenders will allow you to use surplus rental from a portfolio of other properties, or from your income to top up the borrowing. This is where a mortgage broker will come to your aid. We will also recommend a tax adviser. You may have an accountant already, but they are there to fill in your tax return and produce your accounts at the end of the year. A tax adviser will give you the most tax efficient way of owning the property – either in an individual name, in a partnership or as a limited company.
The taxation rules have changed so many times in recent years. In the past you could claim tax relief against the interest you were paying on the mortgage. Now, you’re limited to 20% of that. In a limited company, the interest is chargeable against tax. A tax advisor will explain that in much greater depth.
The mortgage broker is there to guide you through all the things that could go wrong, help you find a solicitor, tax adviser, accountant and get you a lender that suits your circumstances – including the type of property you’re buying, what you’re using it for and what your long-term goals are.
We mentioned earlier that a Buy to Let property is typically let out on an assured shorthold tenancy agreement – but there are lenders that will allow holiday lets or Airbnb lets on Buy to let mortgages. Again, the taxation rules are different on those so that’s where a mortgage broker and a tax adviser will help you through.
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.