A buy to let mortgage is when you buy a property with the intention to rent it out. You become the landlord of that property, and the people living in it become your tenants.
You can rent out the property either privately, or through a letting agent who you pay fees to for overseeing the property.
Buy to let properties are becoming more and more popular, with nearly 4.6 million households renting from a private landlord (source 1).
How much deposit do you need for a Buy to Let Mortgage?
Most buy to let mortgages require a 25% deposit, which is a larger amount than a standard residential mortgage. There are some options for those who have a smaller deposit however, these options will have a higher interest rate & higher fees.
What are the mortgage repayment options for a Buy to Let Mortgage?
There are 2 options you can choose from:
- Capital repayment which means you will own the property outright at the end of the mortgage term if you make all contractual payments.
- Interest-only which means you only pay interest throughout the mortgage term. At the end of the term, you will need to make a lump sum payment to the lender to clear the balance owing.
Interest-only payments are lower than capital repayments, meaning you can generate a higher profit each month from the rent you are charging. Capital repayment is a better strategy if you are using the property to support your income in retirement. With a capital repayment buy to let mortgage, you will earn less profit during the mortgage term but when the mortgage is paid off (usually timed to your desired retirement age), the profit will increase.
How is the But to Let Mortgage assessed?
The gross rental figure of the property is important for buy to let mortgage purposes as the amount you can borrow is based on this. If the rent is paid via a letting agent and money is deducted to cover their fees, the assessment is still made on the gross amount of rent that shows on the tenancy agreement.
Some lenders may also need a minimum income from either employment or self-employment as a secondary affordability requirement.
What are the costs and other considerations?
When purchasing a rental property you should fully investigate all of the applicable fees, such as:
- Higher stamp duty.
- Letting agent fees (if applicable).
- Landlords insurance including buildings (mandatory), contents (if furnished), and any add-ons if chosen such as accidental and malicious damage by tenant, legal expenses, home emergency, rent guarantee.
- Annual safety checks (gas safety etc).
- General property maintenance, repairs and decorating.
- Taxation.
Taxation
If you are thinking about becoming a landlord, you should seek advice from a tax specialist or accountant. If you are a higher-rate tax payer (or close to becoming one), it is extremely important to get tax advice beforehand because you must declare rental income to HMRC.
Guidance from an accountant is very important because you have the option to own the property in your own name or as a limited company. The tax position differs for each option based on your personal circumstances.
What should I do next?
For mortgage purposes, not all properties are suitable for renting. An ideal property has a low purchase price and a high monthly rent, so it’s all about RESEARCH, RESEARCH, RESEARCH!
Don’t be afraid to speak to a letting agent and ask for their advice on what property they think would rent the best in that area.
In summary. There are three advisers you should speak to: a mortgage adviser, a tax specialist or accountant, and a letting agent.
Most Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.
If you are interested in becoming a landlord please get in touch with us by calling 01455 63 61 63 or click here to view our availability & book yourself in.
https://onerooffinancial.co.uk/contact/
Blog written 23/12/2024
The information contained within this blog was correct at the time of publication (23/12/2024), and is subject to change.
Source 1: https://www.nimblefins.co.uk/number-homeowners-and-renters-uk#renters
