Buy-to-let (BTL) mortgages are for landlords who want to buy property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences.
Who can get a buy-to-let mortgage?
Anyone can potentially get a buy-to-let mortgage, usually taking into account the following criteria:
- You want to invest in houses or flats.
- You can afford to take and understand the risks, of investing in property.
- You already own your own home, whether outright or with an outstanding mortgage. In fact, you can get a BTL if you don’t have your own mortgage, though the choice of lenders is smaller – it’s best to ask us directly for advice.
- You have a good credit record and aren’t stretched too much on your other borrowings, for example, credit cards.
- You have a steady, regular income.
- You’re under a certain age. Lenders have upper age limits, typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you’re 45 when you take out a 25-year mortgage it will finish when you’re 70.
How do buy-to-let mortgages work?
Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:
- The fees tend to be much higher.
- Interest rates on buy-to-let mortgages are usually higher.
- The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%).
- Most BTL mortgages are interest-only. This means you don’t pay anything except the interest payment each month, but at the end of the mortgage term, you repay the original loan in full. BTL mortgages are also available on a repayment basis.
- Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy to let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.
- Advising, arranging, lending and administering BTL mortgages for consumers is covered under the same laws as residential mortgages and is regulated by the Financial Conduct Authority (FCA).
How much you can you borrow for buy-to-let mortgages?
- The maximum you can borrow is linked to the amount of rental income you expect to receive. However in some cases, your own additional income can betaken into account too- there are some lenders that might take income on top – this is known as “top slicing” and our advisers can tell you more.
- Lenders typically need the rental income to be 25–45% higher than your mortgage payment.
How Do I Know How Much Rent I will Get?
To find out what your rent might be, talk to local letting agents, or check the local press and online to find out how much similar properties are rented for.
Where do I get a buy-to-let mortgage?
Most of the big banks and some specialist lenders offer BTL mortgages.
What are the main things I need to consider when taking a BTL mortgage?
- Plan for times when there’s no rent coming in.
- Don’t assume your property will always have tenants.
- There will almost certainly be ‘voids’ when the property is unoccupied or rent isn’t paid and you’ll need to have a financial ‘cushion’ to meet your mortgage payments.
- When you do have rent coming in, use some of it to top up your savings account.
- You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.
What are the rules on Stamp Duty for BTL Mortgages?
Unless you have never owned a property, Stamp Duty Land Tax (SDLT) for buy to let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000.
What are the rules on Capital Gains Tax for BTL Mortgages?
If you’re a basic rate tax payer, CGT on buy to let second properties is charged at 18%; and if you’re a higher or additional rate taxpayer it’s charged at 28%. With other assets, the basic-rate of CGT is 10%, and the higher-rate is 20%.
If you sell your buy-to-let property for profit, you will usually pay CGT if your gain is higher than the annual threshold of £12,000 (for the 2019/20 tax year). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,000 (2019/20) to be made in the current tax year.
You can reduce your CGT bill by offsetting costs like Stamp Duty, Solicitor and Estate agent fees or losses made on a sale of a buy to let property in a previous tax year by deducting these from any capital gain.
Any gain from the sale of your property, should be declared on your Self Assessment tax return for that tax year and will be included when working out your tax status for the year which push you into a higher bracket.
What are the rules on Income tax for the money received from houses purchased using BTL mortgages?
The income you receive as rent is liable for income tax. This should be declared on your Self Assessment tax return for the tax year it was earned in.
This might be taxed at 20%, 40% or 45%, depending on your income tax band.
You can offset your rental income against certain allowable expenses, for example, letting agent fees, property maintenance and Council Tax.
What is Mortgage Interest Tax Relief?
The rules around mortgage interest tax relief are changing. This will mean relief for finance costs on residential properties will be restricted to the basic rate of Income Tax.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Previously, you were able to deduct all of this interest on your mortgage from your rental income before tax was paid.
The amount of your interest payments you’re able to deduct is being reduced by 25% a year until 2020 and being replaced by a 20% tax credit for the entire amount.
What are some basic Buy-To-Let eligibility criteria/rules?
- You must have some form of regular / steady income.
- Most lenders will want you to own your own home either with a mortgage or not. There are a handful of lenders that will allow you a first time BTL Mortgage without mortgage history, but this is a small amount
- The property must be in the UK
- The normal maximum Loan to Value (LTV) is 75%, subject to loan amount. There are some 80 – 85% products are available, although fewer lenders offer these
- Properties must be let under an Assured Shorthold Tenancies (AST) or company let agreement
- For a House in Multiple Occupancy (HMO), e.g. a student let – HMO mortgages are different but still something that you can get a mortgage on and our experts are happy to help you
- All Buy to Let mortgages are subject to underwriting and lending criteria that may be varied from time to time – it’s vital that you seek expert advice and assistance.