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Buy to Let Mortgages for the Self-Employed
You may be concerned that Self-Employment will make it difficult for you to get a Buy to Let mortgage. As long as your business is doing well and you have a good deposit, it should be straightforward to find a suitable deal.
What are the features of a Buy to Let Mortgage?
A Buy to Let (BTL) mortgage works largely in the same way as a residential mortgage, although borrowing is a little more expensive. You’ll usually need to contribute a larger deposit – around 25% typically, but you may find some mortgages with lower requirements. In addition, mortgage rates are usually higher compared with a residential loan.
What to consider for Self-Employed Buy to Let
Unlike a standard mortgage, where your income is the basis of how much you could borrow, with a Buy to Let lenders are also interested in the potential rental income. They will want reassurance that the rent will easily cover the monthly repayments. Aim for your target rent to reach at least 125% of the monthly mortgage cost.
Some lenders will expect you to have a certain level of personal income too, so that you could pay the mortgage if there is no tenant in the property.
It’s common for lenders to expect you to already own your own home as part of their lending criteria.
How do lenders assess income for a Self-Employed Buy to Let mortgage?
If a lender needs you to earn a minimum income, they will request proof of your earnings. This usually means sharing a copy of your most recent tax returns and company accounts – each lender may have different rules about how you prove your income. It’s common to need two to three years’ accounting records, but one years’ accounts are acceptable for many lenders. Some lenders require no minimum income for Buy to Let at all.
Mortgage lenders will also check your credit rating to understand whether you have had any debt issues in the past.
Choosing interest-only or repayment Buy to Let mortgages
An important consideration is whether you want to repay the capital of the loan or just the interest. Interest-only mortgages are fairly popular in Buy to Let – as the repayments are much lower, you make more profit on the tenants’ rent.
But at the end of an interest-only mortgage term you will have to repay the loan in full. Don’t rely on selling the property to repay the debt, as house prices can fall. If you choose interest-only you will need to have a solid exit plan.
With a capital repayment mortgage, your tenants’ rent will gradually pay off the loan, so at the end of the term you will own the property outright.
Should I Buy to Let as an individual or through a Limited Company?
In recent years many experienced landlords set up limited companies to manage their properties, largely for tax management reasons.
Whether this is the right solution for you will depend on your situation. It is more common among higher rate taxpayers, who stand to lose 40% of rental profits in tax. A limited company will instead pay corporation tax at 19%. There are pros and cons to this approach, so seek advise from a tax expert.
What are the tax rules?
The first £1,000 of your income from property rental is tax-free as your ‘property allowance.’ If you make a profit of £2,500 to £9,999 after allowable expenses, or £10,000+ before allowable expenses, you will need to pay tax via an annual self-assessment.
Allowable expenses are costs purely for letting the property, such as general maintenance, insurance, letting agent fees and management fees.
You will need to pay additional stamp duty on a Buy to Let property, and if you sell it, the proceeds will be subject to Capital Gains Tax.
How could a Mortgage Broker Help?
Easy Street is here to take the stress out of becoming a landlord. Many Buy to Let mortgages are only available through Mortgage Brokers, and Self-Employed mortgages could be a little harder to find.
We’ll explore your specific situation to find the most suitable options – and the good news is that we could even manage the mortgage application process on your behalf.
We have years of experience in helping Self-Employed applicants get a Buy to Let mortgage to achieve their goals. We are fully authorised and regulated by the Financial Conduct Authority, so get in touch with our expert team of mortgage advisers today.