Buy to Let Mortgages Explained

If you are thinking about buying a property to rent out, you will need to have a specific buy to let mortgage.  These will have different rates and criteria to standard residential mortgages.

The majority of buy to let mortgages are interest only – paying off just the interest and not the capital of the property.  This will mean repayments seem relatively low, however once the mortgage term is up you will need a plan in place to pay off the balance. 

Unless you have built up some savings this may mean selling up or re-mortgaging.  Selling will only be a profitable solution if the property has increased in value during the mortgage term, if not then you risk losing money.  So gaining local knowledge on house prices and the current market before you invest is vital.

Are rates good or bad at the moment?

With so many variables, criteria, products and offers, it’s best to speak to an expert for the most up to date information.  Generally rates have lowered over the last five years, but there have been ups and downs, especially since the Bank of England increased the base rate by 0.25% last year, which has had a knock on effect to mortgage interest rates.

When choosing which mortgage to go for, it is important to look beyond the percentage, as many products require higher upfront fees for buy to let, which could be as much as £2,000.

Deposit

Lenders tend to see buy to let mortgages as higher risk, so they will require a bigger deposit – typically at least 25%.  As with residential mortgages, the more deposit you put down, the better the deal you get.

Stamp Duty

For properties over £40,000 you will need to pay stamp duty – and the rates are higher than for residential.  Additionally, if you already own a home you will be charged an extra 3% for buying a second property.  For example, a £250,000 property would currently equate to a £10,000 stamp duty bill for a second property you are not going to live in.

Tax

You will have to pay tax on any profit you make on your buy to let investment.  This will be income tax on profits from rent, and capital gains tax on profits you make from selling the property.  However you will be able to deduct expenses, such as maintenance, insurance, letting agent fees, and the utility bills you pay.

Rental Income

Mortgage lenders will base what they lend you on how much rent you will get, rather on what your personal earnings are – so it has to add up.  Rental income will usually need to be at least 125% of the mortgage repayments you will pay.  For example, if your mortgage repayment is £500 per month, the rent would need to be at least £625 per month.

From your side, when looking at how much rent you will achieve from a property, aside from the mortgage you need to be sure you can cover all the additional expenses such as landlord insurance fees, property manager fees, and repair costs.

Realistically, its not you that sets the rent – it’s the local market.  There is always a bracket of what people are willing to pay for a particular location – and the best way to find out what that is, is to speak to a local, reputable estate agent who deals with lettings.

Saving for a rainy day

We would suggest it would be a very good idea to have funds available for when things don’t go to plan. 

Be prepared that there may be times when you don’t receive any rent in between tenants – which could be for an extended period of time if you are unable to find suitable new tenants quickly. 

Alternatively, you may end up with problem tenants that don’t pay the rent, damage the property, or cause you to take legal action. 

And there may be times when you need to fork out for unexpected repairs or renovations, not necessarily for aesthetical reasons but to make a property legally safe to live in.

Even if you have long-term dream tenants, you may find interest rates rise affecting your rental income, or if house prices fall when you come to sell up, you may be left with no profit in the end.