Buy To Let Mortgages – the key details explained
Buy-to-let properties are many peoples’ go-to investment choice. We take a look at buy-to-let mortgages, explaining key factors such as rental yield, tax implications, conveyancing and more.
What is a buy-to-let?
A buy-to-let is a property which is bought to rent to a tenant to produce a rental return. Additionally, a buy-to-let can also grow in value, producing a capital gain when you decide to sell. The rent from a buy-to-let property should cover the cost of the mortgage and all other expenses. These other expenses include letting agent fees, building insurance and furniture if provided.
Buy-to-let mortgages
Unless you are a cash buyer, you will need a buy-to-let mortgage. With buy-to-let mortgages, you can rent out your property to tenants. This differs from residential mortgages which are only offered to owners who plan to live on their property.
Buy-to-let mortgages are similar to residential mortgages but with some key differences:
Lending criteria
As you are not living in the property, your tenant will pay your mortgage. Because of this, the lending criteria for buy-to-let mortgages are different.
- The amount you can borrow on a buy-to-let mortgage is based on how much rent the property can generate versus the cost of the mortgage. Lenders will prefer your expected rental income to meet at least 125% of the monthly interest payments on the loan. Though some lenders are more flexible.
- Buy-to-let mortgages usually require you to have a minimum salary of £25,0000.
- The minimum deposit required for buy-to-let mortgages is generally 20-25% of the purchase price. The cheapest deals require a deposit of 40% or more.
Lending rates
- Interest rates are higher on buy-to-let mortgages compared to residential mortgages. This is due to perceived higher risk.
- Arrangement fees on buy-to let-mortgages are typically higher. These can be calculated as a percentage of the loan, rather than a fixed fee.
Non-residents
Overseas investors are subject to different lending requirements compared to UK investors. Their ability to gain mortgage finance and the terms of this lending depend on a range of factors. Obtaining competitive mortgage finance can be difficult for non-residents if they don’t know where to go. Fortunately, our lending partner is very experienced in this arena. As such, we are confident of finding a solution that will fit.
Rental requirements
If you’re thinking of taking out a buy-to-let mortgage to buy a property, the lender will want to know if you can secure enough rent to pay back the mortgage. Many lenders have increased their rental requirements. This is in response to strict new rules from the Prudential Regulation Authority to reduce lending risk. The knock-on effect is that landlords need higher rents to secure the mortgage. However, some specialist lenders have different criteria. Our mortgage partner can find the best solutions for you.
Buy-to-let tax implications
There has been a significant change in respect to buy-to-let taxation. We look into the key changes.
Buy-to-let income tax relief
In the past, landlords were able to offset mortgage interest and buy-to-let mortgage arrangement fees against their income tax bills. For higher earners, this was a substantial relief of up to 45%. From 2017 to 2020 this was phased out. Now it is capped at 20%.
Higher tax paying landlords have been hit hardest. With earners in the top bracket potentially £2,000 out of pocket based on average rents. Whilst cash buyers and investors in the 20% tax band have had less impact on their bottom line.
Do we suggest reading What is buy-to-let mortgage interest tax relief? And how does it affect me? Many high earners have now opted to buy a property through a limed company as there are considerable advantages to this. We have enclosed a list of common questions about purchasing property through a limited company. These links will hopefully help you to decide which option best suits your needs.
Capital gains tax on buy-to-let property
Should your buy-to-let property rises in value by more than your capital gains tax (CGT) allowance by the time you sell it, you’ll have tax to pay. The tax-free allowance is currently £12,300 per person in the 2022/23 tax year.
Stamp duty on buy-to-let property
The table below gives a breakdown of buy-to-let stamp duty rates. For investors into the buy-to-let market, they pay a higher rate compared to residential homeowners.
| Portion of property price (England and NI) | Buy-to-let stamp duty rate |
|---|---|
| £0-£40,000* | 0% |
| £0-£125,000** | 3% |
| £125,001-£250,000 | 5% |
| £250,001-£925,000 | 8% |
| £925,001-£1.5m | 13% |
| £1.5m+ | 15% |
*If total property price is £40,000 or less. **If total property price is more than £40,000, you’ll pay the surcharge on the whole cost.
For overseas homeowners, they are subject to an additional 2% surcharge on property. If an overseas investor buys through a limited company they could potentially navigate around this surcharge. However, there are strict rules in place. A surcharge also applies to certain UK resident companies that are controlled by non-UK residents. For non-UK residents, we suggest you click on the following link to access the appropriate government advice page.
Buy-to-let conveyancing
What is buy-to-let conveyancing?
In simple terms, it is the process of transferring legal ownership of a property to you. This begins when your offer on a property is accepted and finishes when you complete the property.
Your solicitor’s role
Your solicitor should make sure there are no restrictions on renting out the property. They should also be able to advise you on wider issues such as tax implications or environmental and planning law. These are just a few of the reasons why should use a solicitor when buying property.
Why choose Esper Wealth?
There are some considerations to make when looking into investment property. Obtaining suitable mortgage finance is one of them. An investor should first of all make sure investing is likely to be profitable. The key point is to ensure the rent covers all the costs of the property. At Esper Wealth our property consultants will help you to evaluate any purchase to ascertain profitability. We have an experienced independent mortgage broker at hand who can give you best advice.