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Mortgage guide for Buy To Let investments

Buy To Let (BTL) mortgages are specifically for landlords who buy and rent out residential property. BTL mortgage rules are similar to those for regular mortgages, however there are some key differences you will need to take notice of to ensure you understand how they work, and what you legal obligations are.

Is a BTL property investment for me?

If you are considering a BTL investment as a first time purchase you need to consider your options and compare this to how other investments could perform for you.

  • Are you looking for a more tangible investment to stocks and shares?
  • Are you able to lock in your money over a longer period of time?
  • Do you understand property prices can fluctuate?
  • Do you understand the additional risks involved in borrowing money for a BTL investment?
  • Do you understand there may be additional costs and time commitments in owning a BTL property?

If your answer to the above questions is ‘yes’, read on and our guide will go into more detail to help you understand the ins and outs of a BTL property investment.

How does it work?

You can use your own cash to buy a BTL property, or take out a BTL mortgage alongside a cash deposit like you can with a regular mortgage, however there are some key difference:

  • Fees are usually much higher
  • Interest rates are usually higher
  • Minimum deposit levels are usually higher (typically between 20% and 40% loan to value)
  • Most BTL mortgages are interest only, meaning you only pay off interest on the loan and not capital

Once you have bought a property, profit can be earned in two ways:

  • Rental yield
    • Rental income minus running costs and maintenance
  • Capital growth
    • If you sell your property for more than what you paid for it

How do you get a BTL mortgage?

As Principle Mortgages are whole of market advisers we can help you find the most appropriate mortgage deal for your investment.

You can apply for a BTL mortgage if you:

  • Want to invest in residential property
  • Understand the risks and obligations involved
  • Can afford to make an investment
  • You already own your own home (outright of with an existing mortgage)
  • Your credit rating is good
  • You earn a minimum of £25,000 per year
  • You will be under a certain age when the BTL mortgage term ends (typically 70-75 years of age)

How much can you borrow for BTL mortgages?

The maximum amount you can borrow is directly linked to the amount of rental income you expect to receive, so you need to do your research first. For security reasons, lenders typically need the rental income to be 25% to 30% higher than the mortgage payment.

Which lenders offer BTL mortgages?

Most high street banks offer BTL mortgages, along with some specialist lenders. This is where Principle Mortgages can help. We have access to the whole of the market so can research the most suitable deals available that are specific for your investment and personal circumstances.

Make sure you plan for every eventuality

There may be times when your property is empty, for example if a tenant vacates and you haven’t found someone new to move into the property. This is a likely scenario, so you need to make sure you have enough cash to cover the mortgage payments during these periods.

As the property owner, you are also liable for major repair bills so it’s advisable to save some of your rental income to cover such costs.

Before buying a BTL property, you need to make sure you can cover all associated costs, such as survey fees, legal fees, estate agency fees, buildings insurance, and Stamp Duty Land Tax, as well as running and maintenance costs.

Although not a legal requirement, you may also wish to consider additional landlord insurance.

Don’t always assume you can sell the property to repay the mortgage

As house prices fluctuate, they can go down as well as up so if you need to sell the property you may not always get back what you purchased it for, so again careful planning and making savings from rental income is advised.

Tax liabilities

As you are effectively running a BTL investment as a for-profit business venture, you will also have tax liabilities, such as Capital Gains Tax (CGT), Income Tax and Mortgage Interest Tax Relief.

  • CGT
    • If you are a basic rate tax payer, CGT on BTL properties is charged at 18%
    • If you are a higher rate tax payer, CGT is charged at 28%
      • If you sell your BTL property for a profit you will be liable for CGT if your gain is higher than the annual threshold (currently set at £12,000 per year)
    • You can offset certain costs, such as Stamp Duty, Legal and Agent fees
  • Income Tax
    • Rental income is liable for income tax, which needs to be declared of your Self-Assessment tax return
    • Depending on your income tax band, this could be taxed between 20% and 45%
  • Mortgage Interest Tax Relief
    • Relief for associated finance costs (such as mortgage interest & loan interest for property related purchases) on residential properties is restricted to the basic rate of income tax, with no relief available for capital repayments

We work closely with specialist Tax Advisers at SMH Chartered Accountants who can help with any tax advice you may need.

In summary

BTL property investments are a great way to potentially provide yourself with an income stream as long as you are aware of all the associated risks and additional costs involved in running a rental property.

Once you have done all your research, speak to a mortgage adviser like Principle Mortgages and we can provide you with all your options on how to proceed with your purchase.

Speak to one of our advisers today on 03301 071 558 or [email protected] to discuss your Buy To Let mortgage requirements.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments
The financial conduct Authority does not regulate commercial buy to lets.