All You Need to Know About Buy to Let Mortgages

Gareth Hill 12th January 2016 ROC News

With the shortfall in houses across the UK alongside rising property prices, there has been a fairly significant buoyancy in the buy-to-let market in recent times. And, despite certain changes to legislation and taxation (which we’ve spoken about in these pages before) the market continues to grow year-on-year; offering investors very real opportunities for healthy returns on their outlay.

Perhaps unsurprisingly then, such growth has prompted a significant increase in applications for buy-to-let mortgages, with more and more investors of varied budgetary sizes seeking to take a foothold in the lettings arena.

So, if you happen to be one of those considering a buy-to-let mortgage, here’s a few things that you should be aware of before you set out.

Buy-to-Let Mortgages Have Higher Deposits Than Residential

As a business investment the terms on a buy-to-let mortgage are generally different to those you might find with a typical residential mortgage. For one thing, you’ll often find that associated arrangement fees are somewhat higher on a buy-to-let mortgage. In addition the deposit you’ll need to put down will usually be greater than you might need to find with a residential mortgage.

Typical buy-to-let mortgages will have a loan-to-value of 75%, meaning you would require a deposit of 25% of the value of the property you’re seeking to purchase. Searching the market may reveal mortgages at more favourable payment terms, but this will almost always be on the requirement of larger deposits, sometimes in the region of 30 – 40%.

Don’t Let Your Property On A Residential Mortgage

If you’re purchasing a property with the intention of letting it out then you need buy-to-let mortgages. You must not take out a residential mortgage. The lender will require details of how you intend to rent the property as well as your levels of income. Taking out a residential mortgage on a property you’re going to let out is considered fraudulent activity. At best, this will significantly harm your chances of future finance and at worst may see you prosecuted and even imprisoned.

Repayment Criteria

With the above in mind, it’s important to understand the criteria you’ll likely need to meet when applying for a buy-to-let mortgage. This will entail the level of monthly rent you’ll be receiving on the property. Typically your lender will be looking for a rental amount that’s at least 125% of the interest payments on the loan. In other words, a monthly rental income which is 25% higher than your monthly payment figure. This additional 25% is built in to the criteria as a buffer against potential void periods when the property is empty, ensuring that you can still meet any repayment terms in short spells when income has dried up.

Don’t Forget the Tax

As an investment, whatever income you receive is taxable and should be declared as part of your annual self-assessment. As with all types of earnings, your rate of tax will be dependent on how much your income actually is with current levels ranging from 20% to 45%. Now, in order to ensure you are paying the correct levels of tax relative to your property business don’t forget that you can offset some of the income through legitimate and allowable expenses incurred.

Tenant Type

A final thing to consider when making your buy-to-let application is in relation to the property you are seeking to purchase and indeed, the tenants you’ll be attracting. For instance, if you are seeking to enter the student lettings market then your mortgage must be appropriate for Houses of Multiple Occupation (HMO) where you may be letting to three or more individual tenants with shared living space.

The buy-to-let market continues to thrive and prospects for sustained long-term growth remains strong in the UK. But if you are considering making that step into the market and require a buy-to-let mortgage to fund your investment, then understanding the nuances and regulations before you begin will provide you greater foundations upon which to build your property portfolio in the future.

Gareth Hill 12th January 2016 ROC News

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