More about buy-to-let mortgages

July, 2022

Buy-to-let (BTL) mortgages are typically for landlords who want to buy property to rent it out. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences.

Who can get a buy-to-let mortgage?

You might get a buy-to-let mortgage under the following circumstances:

  • you want to invest in houses or flats
  • you can afford to take and understand the risks of investing in property
  • you already own your own home, whether outright or with an outstanding mortgage
  • you have a good credit record and aren’t stretched too much on your other borrowings, for example, credit cards
  • you earn £25,000+ a year - if you earn less than this you might struggle to get a lender to approve your buy-to-let mortgage
  • you’re under a certain age - lenders have upper age limits, typically between 70 and 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you’re 45 when you take out a 25-year mortgage it will finish when you’re 70.

How do buy-to-let mortgages work? 

Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences. 

  • The fees tend to be much higher.
  • Interest rates on buy-to-let mortgages are usually higher.
  • The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%).
  • Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy-to-let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.
  • Advising, arranging, lending and administering BTL mortgages for consumers is covered under the same laws as residential mortgages and is regulated by the Financial Conduct Authority (FCA)

How much can you borrow for buy-to-let mortgages? 

The maximum you can borrow is linked to the amount of rental income you expect to receive.

Lenders usually need the rental income to be 25–30% higher than your mortgage payment.

To find out what your rent might be, talk to local letting agents, or check rental listings online to find out how much similar properties are rented for.

Find out how much property is selling for in a particular area on Rightmove or Zoopla.

Where to get a buy-to-let mortgage

Most of the big banks and some specialist lenders offer BTL mortgages. 

It’s a good idea to talk to a mortgage broker before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.

Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs, however they won’t all give you the same results, so make sure you use more than one site before making a decision. 

it is also important to do some research into the type of product and features you need before making a purchase or changing supplier, don’t just look at the headline rates offered on the mortgage. There are often other fees and charges involved.

Plan for times when there’s no rent coming in

Don’t assume your property will always have tenants. 

There will almost certainly be times when the property is unoccupied, or rent isn’t paid and you’ll need to have a financial ‘cushion’ to meet your mortgage payments.

When you do have rent coming in, use some of it to top up your savings account.

You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.

Don’t rely on selling the property to repay the mortgage

Don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage. 

If house prices fall, you might not be able to sell for as much as you had hoped.

If this happens, you’ll be left to make up the difference on the mortgage.

Stamp Duty

Stamp Duty Land Tax (SDLT) for buy to let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000.

Buy-to-let and tax

Capital Gains Tax

If you’re a basic rate tax payer, CGT on buy to let second properties is charged at 18% and if you’re a higher or additional rate tax payer it’s charged at 28%. With other assets, the basic-rate of CGT is 10%, and the higher-rate is 20%.

If you sell your buy-to-let property for profit, you will usually pay CGT if your gain is higher than the annual threshold of £12,300 (for the 2022-23 tax year). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,600 (2022-23) to be made in the current tax year. 

You can reduce your CGT bill by offsetting costs like Stamp Duty, solicitor and estate agent fees or losses made on a sale of a buy to let property in a previous tax year by deducting these from any capital gain.

Any gain from the sale of your property should be declared to HMRC and any tax due paid within 30 days. The resulting capital gain is included with your income and taxed at whatever marginal rate (18% and/or 28%) you would then pay. It’s not possible to carry any CGT annual allowance forward or back, so it must be used in the current tax year.

Income Tax

The income you receive as rent is treated as taxable income and may be liable to income tax. This should be declared on your Self-Assessment tax return for the tax year it was earned in.

In England, Wales and Northern Ireland, this might be taxed at 20%, 40% or 45%, depending on your income tax band. In Scotland it might be taxed at 19%, 20%, 21%, 41% or 46%.

You can offset your rental income against certain allowable expenses, for example, letting agent fees, property maintenance and Council Tax.

Mortgage Interest Tax Relief 

Landlords are no longer able to deduct mortgage interest from rental income to reduce the tax they pay. You’ll now receive a tax credit based on 20% of the interest element of your mortgage payments. This rule change could mean that you’ll pay a lot more in tax than you might have done before. 

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