The 2020 guide to buy to let mortgages

Buying a property

Buy to let mortgages are a must for most residential landlords. It is important to understand how a buy to let mortgages works.

In our handy guide below, we set out what every buy to let property owner needs to know about buy to let mortgages.

Who can get a buy-to-let mortgage?

If you want to take out a buy-to-let mortgage you will usually need to already own your own home and have an income of more than £25,000 a year. You will need a good credit rating and be young enough to comply with the lender’s upper age limit when the mortgage ends. Compare here.

How do buy-to-let mortgages work?

Just like residential mortgages, a buy to let mortgage is a loan of a capital sum used to purchase or refinance a property. The lender secures the loan by taking a charge over the property. They can use this charge to sell the property if you do not keep up with repayments. There are some differences to residential mortgages. Buy-to-let mortgages usually require a higher percentage deposit than if you are buying a home to live in yourself. The mortgage is also likely to be interest only.

How much you can you borrow for buy-to-let mortgages

The amount you can borrow on a buy to let mortgage will depend upon the rent you will get for the property. Lenders usually insist that the rent you will get will be between a quarter and a third higher than the mortgage repayments. This means that the rent will cover the repayments, plus other costs landlords will have such as insurance and maintenance.

What else should you consider before buying a buy-to-let property?

All landlords will have times when there is no rent coming into the property, known as void periods. This can happen in the gap between one tenant leaving and another tenancy starting. It is also possible that your tenant may struggle to pay their rent if their circumstances change. You will need to have reserves to cover your mortgage and insurance costs during these periods, as well as to cover any major items of expenditure such as a new boiler or roof repairs.

You should also have a plan to repay the mortgage when the term comes to an end. Although you may be able to do this by selling the property, remember that property values can go down which could leave you with a shortfall. There is also no guarantee that you will be able to sell the property.

Buy-to-let and tax

In the past, buy-to-let landlords enjoyed generous tax incentives. These have been greatly reduced but there are still some tax allowances available. Specialist tax advice is advisable.

A buy to let as an investment

A buy-to-let property is a medium to long term investment. You will need to be prepared for the risk that the value of the property can decrease as well as increase. You will also need to accept that you are unlikely to be able to realise the investment quickly as property can take some time to sell. There is a risk that you may not make a profit at all.

The two main ways of making money from a buy to let property are through the rental yield and through capital growth. Capital growth is the change in value of the property itself. If property prices rise, then you may be able to sell the property for more than you paid for it.

Rental yield is the difference between the rent you receive for the property and your running costs including mortgage, repairs and insurance.

Deposits for buy-to-let, costs and tax relief

You will need at least a 25% deposit to buy a buy-to-let property. In addition, you will need to budget for the survey fee, solicitor’s costs, stamp duty, mortgage fees, and ongoing repairs and maintenance. You will need to have buildings insurance and landlord insurance is also advisable.

Landlords should budget for both routine inspections and maintenance, for example of the electrical and heating systems, and the likelihood of more major repairs and renovations being required at some point.

If you are buying a property as a buy-to-let, there is extra stamp duty to pay. The additional rate is currently 3% although this can change from time to time.

Landlords will need to pay tax on the rent they receive from the property. This is paid as income tax unless you set up a limited company. Until relatively recently, landlords could deduct allowable expenses including mortgage interest from the rent before paying tax. From this year these deductions are very limited, and given as a reduction in liability to tax rather than reducing the income tax is paid on. This means that landlords’ tax bills will rise. The changes have a bigger impact on higher and additional rate tax payers.

When you sell the property you will need to pay Capital Gains Tax on any increase in the value of the property.

Choosing a buy to let property

It is important that you do your research before you buy a property to use as a buy-to-let. Talk to local estate agents about the types of property that are in demand in the area and set your budget. Don’t forget to factor in the costs you will need to pay for your mortgage when you draw up your budget, and take into account the general financial forecast. It will help you to let your property more easily and maximise your income if you can appeal to a certain type of tenant, for example, a family home will be more difficult to let in an area with lots of student lets.

Your obligations as a landlord

All residential landlords have legal obligations towards their tenants. These include responsibility for basic repairs and maintenance and, importantly, gas and electrical safety. All residential landlords must keep their properties safe and must make sure that all gas and electrical equipment is safe. Smoke alarms must be installed on each floor of the property and rooms with a coal fire or wood burning stove will need a carbon monoxide detector. The landlord will need to make sure that each gas appliance has a gas safety certificate.

Landlords are also required, for example, to provide tenants with a valid Energy Performance Certificate and to ensure that the tenant’s deposit is protected in an approved scheme.

Those who are new to the rental sector and any other landlords who are unsure of their legal obligations should take specialist advice on the extent of their obligations to avoid potential fines.

Self management vs agency management

Landlords may wish to manage a property themselves. This is possible for those with the time, knowledge and experience especially if they have a small number of properties. Less experienced landlords and those with a large number of properties to manage may prefer to employ an agency. This does, however, come at a cost.