Buy to Let Mortgages – everything you need to know
Whether you’re renting out a property you already own or are buying one especially, you will need a dedicated mortgage. Easy Street is here to help you find a Buy to Let mortgage that suits you.
How do Buy to Let mortgages work?
A Buy to Let mortgage helps you buy residential property to rent out to tenants. There are a few differences between Buy to Let mortgages and standard residential ones. You will usually need a larger deposit, for example, and interest rates are generally higher.
You will still need to make monthly repayments, but your tenants’ rent will ideally reimburse the cost.
Who could get a Buy to Let mortgage?
As with any mortgage you will need to meet the lender’s criteria to get the loan. Each lender will have different requirements, but a common one is it is ideal you already own a home, not all lenders insist on this. You may also need to have a certain level of income alongside the rental property, so if for any reason the tenant does not cover the payment the lender is reassured you can still make the payments on your mortgage.
Some lenders will set an upper age limit. For most mortgages you need to be under 75 at the end of the mortgage term, but some lenders will go higher.
How much could I borrow on a Buy to Let mortgage?
Instead of calculating your loan amount based solely on your income, for a Buy to Let mortgage the lender will look at the monthly rent your property could generate.
Often your rent will be expected to cover 125% of the monthly mortgage payment based on either the pay rate or a stress tested rate (typically 5 – 5.5%). Some lenders may want this figure to reach 145%.
It’s very important to research the rental market carefully in your chosen area before making an offer on a buy to let property. Make sure there is strong demand locally and that you will make a decent profit on typical rental costs.
Interest only or Repayment?
It’s fairly common for landlords to choose an interest-only mortgage, where the monthly payment simply pays the mortgage interest. The appeal of this approach is that your monthly repayments are considerably lower.
The downside of course is that you’re not decreasing the overall mortgage debt. At the end of the mortgage term you will need to pay back the same amount that you originally borrowed. Many people plan to sell the property to settle the debt, but this is a risky plan – property values could go down as well as up.
As with residential mortgages, you could choose between fixed rate or variable rate Buy to Let deals.
What are the main risks with Buy to Let?
The key risk of Buy to Let is that your costs eat into your planned profit. Bear in mind that your property may not be occupied 52 weeks a year. There may be gaps between a tenant leaving and a new one moving in – but obviously your mortgage will still need to be paid.
If you choose to appoint a letting agent to manage the property on your behalf, cost this out carefully. Make sure that you could both attract tenants and make a profit. Setting your rent too high could make it difficult to rent the property out.
You will also need to plan for various rental property costs such as maintenance, annual gas safety checks, advertising etc. You will also need a form of home insurance called landlord’s insurance, and your rental income is likely to be eligible for tax.
Buy to Let mortgages and tax
Buying a property to let is subject to stamp duty, and if you already own a home you’ll have to pay a minimum of 3% additional duty. Enter the property value into the government’s stamp duty calculator
online to find out much this will cost.
You will also need to pay income tax on the profit from your rental property if it exceeds the HMRC Personal Allowance. You will need to do this via Self-Assessment. Some landlords choose to appoint an accountant to manage their tax affairs.
How could Easy Street help me Buy to Let?
Many Buy to Let mortgage deals are only available via Mortgage Brokers like Easy Street, so it makes sense to work with a qualified broker if you want a competitive loan.
At Easy Street we have helped many first-time landlords buy properties to let and achieve their goals for rental income and mortgage repayment.