For many, the idea of buying a property as an investment feels safer than investing in stocks or shares, and it also allows a level of involvement. You can be a hands-on landlord or let an agency take care of your tenants, but many feel more comfortable investing in property at a variety of pricing levels.
From Stamp Duty to Buy to Let (BTL) mortgages, there’s a lot to get your head around.
Here’s everything you need to know about Buy to Let.
What is Buy to Let?
Buy to Let is when a property is bought specifically for the purposes of renting it out.
How does Buy to Let work?
When you Buy to Let you purchase the property and then act as the landlord, letting it out and charging rental payments. In order to make a profit, these payments should be higher than the cost of maintenance, letting agent fees (if applicable) and the monthly mortgage repayments.
What costs are there?
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You’ll still need to pay the deposit, mortgage fees and Stamp Duty when you purchase a BTL property. If you already own a property, you will pay a higher rate of Stamp Duty.
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You may also need to pay for renovation and improvements before you rent the property out for the first time.
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You’ll need to pay income tax on your rental income. Like any self-employment, allowable expenses are deducted from your taxable allowance. Expenses include maintenance, insurance, letting agent fees and any utility bills you pay for the property.
Read more about
income tax when you let property.
Buy to Let mortgages explained
What is a Buy to Let mortgage?
A BTL mortgage is simply a mortgage especially for a BTL property. If you plan on renting out your property you
must have a BTL mortgage. It’s similar to an ordinary mortgage in that you borrow a large sum of money for a set period of time, but, because you won’t be living in the property, there are some important differences.
How Buy to Let mortgages work
The first difference is that the vast majority of BTL mortgages are interest only – so your monthly payments will only pay off the interest on the loan and you don’t pay off the full sum (the capital) right away.
This means that the monthly payments will be less, but you must be prepared to either pay off the loan in full, sell the house or remortgage at the end of the mortgage term.
This means that you can buy the house and make money on the rent for the payment term (for example, 25 years) and then pay off the mortgage by selling the house at the end.
Repayment mortgages (where the capital and the interest are paid back in monthly instalments) are uncommon for BTL properties. You’d have to charge more rent to cover the increased monthly price. However, that means that at the end of the mortgage term you could either carry on letting it out and keep all of the rent yourself, or sell the house and keep the money, instead of having to use it to pay off a mortgage.
Another key difference between a residential and BTL mortgage is that the amount you can apply for depends on the rent you’re planning on charging – not your salary. So, if the property is large or ideally located, you’ll be able to charge more rent and so can get a larger mortgage.
How much deposit do I need for a Buy to Let mortgage?
The third difference between a standard mortgage and a BTL mortgage is the deposit. Buy to Let mortgages are considered much riskier than residential ones so lenders will often require a larger deposit, often at least 25%.
Just like ordinary mortgages, the bigger the deposit the better the deal you’ll be offered, so you should put down as big a deposit as you can.
Lending restrictions
The Bank of England has recently started to impose tougher lending restrictions with strict affordability tests. Part of this includes using Interest Cover Ratios (ICRs). An ICR is the ratio to which a property’s rental income must cover the mortgage payments made by the landlord. Lenders can use this ratio to work out how much money the landlord is likely to make.
Many lenders want the predicted rental income to be 125% of the landlord’s mortgage payments. So, for example, if the landlord will receive a rental income of £750 per month, an ideal mortgage repayment amount would be £600 per month.
However, some lenders may want a higher ICR – sometimes as high as 145%.
Before any agreement is signed the lender will need to be confident that you’ll actually be able to get the rental income you’ve predicted. They often do this by looking at the price of similar properties in the area.
Mortgages for portfolio landlords
Portfolio landlords are landlords with four or more properties.
If you’re a portfolio landlord it’s a little more difficult for you to access additional finance.
While you used to just be required to provide overall profit and loss figures when applying for a mortgage or remortgage, now you must show mortgage details, cash flow projections, and business models for every property you own.
If you have lots of mortgages in this portfolio, it will be harder to get another one.
There are a number of conditions that your lender might ask for:
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There may be a maximum number of properties you’re allowed in your portfolio.
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They may ask for a maximum Loan-To-Value ratio. The Loan-To-Value (LTV) ratio is the ratio of the loan to the value of the asset (the property in this case). So, lenders may ask for an LTV of 65% or lower across your portfolio.
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They might insist on every property in your portfolio having an ICR of at least 100%.
Some banks and lenders have adopted a system known as ‘top slicing’. This is when the landlord’s personal income (such as a pension or salary) is taken away from their portfolio and is included in affordability assessments.
This means that if your personal income is significant, you could use it to bridge any shortfalls.
Remortgaging
Sometimes refinancing can be a better option than buying more property, especially given the
Stamp Duty surcharge for property investors and cuts to mortgage interest tax relief.
There’s an increase in the number of lenders cutting up-front fees – according to Which? one in five remortgaging products are being offered on a no-fee basis. Cashback incentives are also on the rise.
Buy to Let mortgages for First Time Buyers
Buying a property to let is a great option for First Time Buyers who live somewhere with high house prices, such as London. Buying a property to let out in a cheaper area can be a great additional income to go towards
saving for a deposit.
However, you will inevitably face some challenges. There will likely be fewer options available to you so you’ll need a bigger deposit, and you won’t qualify for the Stamp Duty relief that most first-time buyers would.
You will avoid the 5% surcharge that usually applies to BTL buyers, but you’ll have to pay it if you buy a property for yourself or a second Buy to Let property without selling the first one beforehand.
However, it is possible for First Time Buyers to Buy to Let.
In July 2019 online mortgage broker Habito announced it was launching a mortgage range for BTL landlords, aimed specifically at first time buyers as well as self-employed, retired, or older landlords. With a choice of fixed rate timeframes and no minimum income required, mortgages like these could be ideal for a First Time Buyer looking to Buy to Let.
Don’t worry though – if buying to let isn’t for you, there are other
ways to save for a deposit.
Switching to a Buy to Let mortgage
Some people find themselves becoming ‘accidental landlords’ – they own a house that was never intended to be rented out and so has an owner-occupier mortgage, but then they need to switch.
This can happen for a number of reasons – for example you might move home but not want to sell your old property straight away, or you might inherit a property.
You must tell your mortgage lender if you plan on letting out a home that currently has an owner-occupier mortgage – to not do so might invalidate your mortgage.
What happens next depends on your lender. You might need to remortgage in which case you might need to change lenders, or you may be able to obtain ‘consent to let’ from your current lender.
Things to remember:
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Some BTL mortgages have very good rates but very high upfront costs. Make sure you know the details of the whole deal you’re getting.
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Your rental income must be enough to cover your mortgage repayments and other BTL expenses such as landlord’s insurance and management fees. Make sure you budget well before you buy, remembering that there will likely be periods where the property is empty between tenancies and there may be unexpected expenses like repairs (if they’re not covered by landlord’s insurance).
If you’re wanting to make a medium to long-term investment, BTL could be for you. You just need to make sure you understand the details like BTL mortgages, and the potential risks like a fluctuating housing market, to help you get the most from your investment.
Other things to consider
Some other things to consider when thinking about Buy to Let:
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Do you want to be a ‘hands on’ landlord, or would you rather hire an estate agency to deal with looking after the property, sourcing tenants, and collecting rent?
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Pick a property that will be a great choice for renters – remember you’re not picking a property for you. Find out more information about choosing a Buy to Let property.
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Are you willing to keep up to date with the changes to tenancy law? Some changes can have a big impact on the profit you make on the property, or even how to deal with evictions.
Buy to Let FAQs
What salary do you need for a Buy to Let mortgage?
Most BTL lenders will require you to earn at least £25,000 a year. There are some lenders that can provide a BTL mortgage without a minimum income requirement if you follow their lending requirements.
Can a Buy to Let be rented to family?
It is possible to rent your BTL property to a family member, but this should be disclosed to your mortgage lender as many lenders have strict regulations for renting to family. Many lenders will require you to get a special Family BTL mortgage.
Family Buy to Let mortgages allow you to let to family members and charge reduced rent, but you will often need a bigger deposit and the affordability assessments are stricter than they are with regular Buy to Let.
Can you live in your own Buy to Let?
You are not allowed to live in your own BTL property as this would be in breach of the terms of a BTL mortgage. However, with a Family BTL you are able to live in the property alongside your family member(s).