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Buy to Let
The buy to let mortgage market is vast and contains many complexities. Let us be your guide to making the most of your investment.
What is a Buy to Let Mortgage?
A buy to let mortgage is a loan secured on a property, rented to a private tenant. To explain, a private tenant means it is a person, rather than a business. If you want to rent to a business you will need a Commercial Mortgage.
Buy to Let Mortgages
Depending on your experience and circumstances, a buy to let mortgage could be regulated or unregulated by the Financial Conduct Authority. This determines the rules and the lenders which are available to you.
You will have less lenders to pick from if the buy to let mortgage is regulated. However, you won’t be afforded the same level of consumer protection as a residential mortgage if the buy to let mortgage is unregulated. It is important to seek professional mortgage advice.
What Are the Types of Buy to Let Mortgage?
Buy to let mortgages are available in similar forms to residential mortgages. Fixed rate mortgages and discounted mortgages are the most common types of mortgage.
Topics Covered Below
What are the Benefits of a Buy to Let Mortgage?
Who Can Get a Buy to Let Mortgage?
How Does a Buy to Let Mortgage Work?
What Are the Rules for Buy to Let Mortgages?
Is a Buy to Let Mortgage Necessary?
Who Can I Rent My Property to?
Can You Let a Property Without a Buy to Let Mortgage?
How Long Do I Have to Own a House Before I Can Rent it Out?
What is the Tax Treatment of a Buy to Let Mortgage?
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What are the Benefits of a Buy to Let Mortgage?
Potential capital appreciation and rental income are the two key benefits of a buy to let mortgage.
Capital Appreciation
Your property value may increase over time. Therefore you could sell the property for a profit. You may also be able to ‘leverage’ the value by borrowing more money to further invest. As a result, this is a common way of growing a property portfolio. Contact us for a discussion about this.
Rental Income
Your tenant will pay you rent for use of the property. This income may cover the mortgage payments and ultimately pay the mortgage debt for you. Rental income could provide you with a source of income either now or later. You could use the rental income to buy further property, or perhaps as a retirement income source.
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Who Can Get a Buy to Let Mortgage?
Almost anyone can get a buy to let mortgage. You may find it more difficult if you are a First Time Buyer or a First Time Landlord. You might also find it difficult if your income is less than £25,000 per year. However, it may still be possible to obtain a buy to let mortgage.
That said, a buy to let is an investment. Almost all opportunities for financial gain carry a risk of financial loss. You need to understand and be able to afford those risks. Talk to us to help you make an informed decision about what is right for you.
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How Does a Buy to Let Mortgage Work?
A buy to let mortgage works like most other mortgages. A mortgage is a loan secured on a property by way of a Mortgage Deed. You pay the lender installments of interest and perhaps also capital.
Key differences between a buy to let and a residential mortgage:
- Residential mortgages are available to almost everyone, buy to let mortgages may not be.
- Each lender has different lending criteria attached to them. The criteria is rules around whether they will accept the mortgage or not. The rules state what you can and cannot do and which applicants they will or will not accept.
- Lenders will assess the affordability for a buy to let mortgage differently. In general, affordability for a residential mortgage is assessed against personal income and outgoings. Affordability for a buy to let mortgage is assessed against rental income.
- Comparatively, interest rates are generally higher with a buy to let mortgage than a residential mortgage. This reflects the perception of increased risk to the lender.
- Generally, the maximum buy to let mortgage you can obtain on a like-for-like basis is less than a residential mortgage.
- Buy to let mortgages are often unregulated. This means the Financial Conduct Authority does not police them as strictly and applicants have less protection.
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What Are the Rules for Buy to Let Mortgages?
When you apply for a buy to let mortgage the lender will check for affordability. A ‘Stress test’ is the name of an affordability check for a buy to let mortgage. The stress test is against the rental income rather than your personal income. The lender may require the rental income to be a multiple of the mortgage payment. Also, the lender may test the rental income against a standard interest rate such as 5.5%. The multiple used for the test varies depending on a number of factors. Your lenders criteria and your personal tax banding are the primary factors . The requirement is often rental cover of 125% for a basic rate taxpayer. If you are a higher rate taxpayer some lenders will stress test at 145%.
It is sometimes the case the rental income is not sufficient to satisfy the test. In this scenario some lenders may allow you to use a proportion of your personal income. ‘Top slicing’ is the name given to this practice. Not all lenders will allow this. Therefore it is important to understand your income and the lenders requirements prior to applying for a mortgage. Simple Fast Mortgage can help find you a suitable mortgage lender.
Is a Buy to Let Mortgage Necessary?
If you are buying a property to rent then mortgage lenders will require that you have a buy to let mortgage. As such, you cannot use a residential mortgage for this purpose. If you have a residential property where you previously lived but now want to rent out you should also have a buy to let mortgage. However, your mortgage lender may permit a ‘Consent to Let’ if you are tied into your current residential mortgage.
A Consent to Let is a short term approval for you to rent the property while remaining on your current residential mortgage deal. A Consent to Let is usually granted to you on a 6 or 12 month basis. Following this, you will have to re-apply for a Consent to Let. Your Consent to Let approval is never guaranteed, and if it is it may have certain conditions attached to it. For example, this could be an increased interest rate.
Who Can I Rent My Property to?
Anyone. However, you can only rent the property to private tenants with a buy to let mortgage. If you want to rent your property to a business you will require a Commercial Mortgage.
Can You Let a Property Without a Buy to Let Mortgage?
Only with your mortgage lenders agreement under a Consent to Let arrangement. You may have to pay an additional fee or rate of interest to do this. Also, you may have to satisfy other conditions.
How Long Do I Have to Own a House Before I Can Rent it Out?
You can rent your property from day one provided you have a buy to let mortgage. If you have a residential mortgage it will be down to the lender discretion if and when they allow you to rent the property.
What is the Tax Treatment of a Buy to Let Mortgage?
Rental income is subject to income tax assessment. There may be allowances or expenses you can deduct such as the cost of property maintenance or repair.
Historically, many people decided to become landlords. This was because mortgage interest was an allowable expense against rental income. Currently, the mortgage interest is no longer an allowable expense if you personally own the property.
Profit on sale is subject to capital gains tax assessment. There may be allowances or expenses you can deduct. For example capital gain tax allowances or costs such as legals fees. Timing a capital gain is important to minimise any tax due. If you are thinking about selling you should seek advice from a tax accountant.
What is an SPV?
A Special Purpose Vehicle SPV is a limited company (or Partnership or LLP) created for only one particular purpose. An SPV can hold Buy to let property.
An SPV has a registered SIC code at Companies House. These codes describe the nature for the business and which industry it trades in. SIC code 68209 is suitable for buy to let business. The description of this SIC code is, ‘Letting and Operating of own or leased Real Estate’.
For instance, if you were ‘flipping’ properties SIC code 68100 might be used. The description of this SIC code is, ‘Buying and Selling of own Real Estate’. Other SIC codes are available and you should seek specialist advice in this area. In summary, if you are buying a property under a limited company the lender may expect it to be registered under a specific SIC code.
Should I Use a Limited Company or SPV?
You can buy or transfer property into a limited company. Alternatively you can hold property personally. Either way there will be tax considerations. unfortunately, deciding which is best for you is complex. The decision depends as much on your future intentions as it does on your current circumstances.
Is it Better to Sell My House or Rent it Out?
This is one of the most common questions we are asked. A but to let is a risk based investment. As such, you should consider if you are willing to accept the risk involved. For example, the risk of property damage, the risk of rent not being paid, or the risk of the property being vacant. There is also the risk that you may not be able to sell at opportune time or price. There may be tax and other considerations. It is best to speak to a specialist mortgage broker before making a decision.
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