Buy to Let Mortgages
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Buy to Let Mortgage
Buy to Let mortgages with Carolyn Dunion.
Some buy to lets are not regulated by the Financial Conduct Authority.
What is a Buy to Let mortgage and how do they work?
Buy to Let mortgages are designed to allow individuals or companies to buy a property that they don’t intend to live in themselves. It’s usually for investment purposes, where you’re intending it to rent out to somebody else.
These mortgages work a little bit differently, because there are different requirements for deposits and affordability checks.
What is the difference between a Buy to Let mortgage and a residential mortgage?
It’s designed for you to buy a property that you don’t intend to live in yourself. You’ll find there are different deposit requirements and lenders usually use the rental figure to assess affordability, rather than your own income. A lot of lenders will require that you can demonstrate a minimum income.
It depends on the provider and there are a lot of different options and ways you can structure it. For example, an interest only mortgage is a straightforward choice with a Buy to Let mortgage, whereas with residential mortgages you usually have to qualify to get an interest only product.
How is a personal Buy to Let different to a limited company Buy to Let?
A personal Buy to Let is a property with a mortgage registered to an individual, or jointly as a couple. The property is owned by you and the mortgage is in your own name.
Limited company Buy to Let has become more popular recently, where you have a limited company which is a separate legal entity. While you own the limited company, the company in turn owns the property and mortgage.
Often what’s required with a limited company mortgage is to give a director’s guarantee for the finance. So if you default on the mortgage payments they can pursue you individually. With a personal Buy to Let mortgage they can always pursue you individually. Like a residential mortgage, if you don’t pay they can seek to repossess the property.
You still have that risk factor with a limited company Buy to Let, but legally you don’t own that property. It can be advantageous for tax purposes.
Who can get a Buy to Let mortgage? Can anyone?
Theoretically, anyone can get a Buy to Let mortgage. However, it’s become much more common for lenders to want you to own your own residential property.
They would raise the question that if you were looking to buy property as a Buy to Let, why wouldn’t you want to own your own property to live in? Most lenders will want you to be a homeowner in the UK.
How much can you borrow on a Buy to Let mortgage and what sort of deposit do I need?
The vast majority of lenders will require a 25% deposit. A couple of lenders will accept a 20% deposit. However, you also have to meet their affordability assessment which is based on a complicated calculation.
These calculations use the rental value of the property. Each lender has their own way of assessing that. They also will take into account the individual’s tax position, so if you’re a higher rate taxpayer you will likely be able to borrow less, because more of the rent will be taxable. Therefore, the income you’re getting from the property will be reduced in real terms.
They will also potentially factor in your credit profile within their calculation as well. So although you might have a 25% deposit, if the rent is too low on that property they might require a 30% or a 40% deposit.
Because these calculations can be quite tricky, it’s well worth having a conversation with an advisor. Some lenders offer something called ‘top slicing’ where if the rent calculation doesn’t stack up, the lender will allow you to borrow more if your income supports it.
Again, these involve complicated calculations, so get an advisor to help you navigate through it.
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How much does a Buy to Let property cost?
The actual purchase of the property is no different from any other purchase. You make an offer on the property and that will be the price you pay. Obviously investors don’t want to overpay for the property so they’re looking for good deals where they can.
You will have the usual costs, such as for a solicitor to carry out the transaction, and you might have advisor fees. You will have tax to pay: depending on the property price there may be ‘land and buildings transaction tax’ (LBTT), which used to be called stamp duty.
Because that doesn’t roll off the tongue, a lot of people still refer to it as stamp duty. But that ends up confusing everybody – people think there are two taxes. But it’s just LBTT.
That’s assessed on how much you pay for the property. If you’re buying a Buy to Let property, you almost certainly own your own residential property, which means you will be liable for additional dwelling tax. That’s irrelevant of how much you pay and will always apply. Currently in Scotland that’s 6%. So, if you buy a property at £100,000, you’ll pay £6,000 in tax. That rate is up for review regularly so could easily increase or decrease.
Really, that additional dwelling tax is the only cost when buying a Buy to Let property – the rest of it’s as you would expect for any purchase.
Once you own that property, there are a lot of health and safety requirements to consider as a landlord. You should consult with a letting agent to find out exactly what your legal responsibilities are. That can be quite costly if the property has never been let before, so that’s an important thing to consider.
Is it illegal to rent out a house without a Buy to Let mortgage, and is it illegal to live in your own Buy to Let?
It’s not exactly illegal, but theoretically it’s a breach of your mortgage conditions to live in your Buy to Let property.
Sometimes we’ll have people who have bought property and would incur early repayment charges if they wanted to restructure their finances. But they get moved away for work. In those scenarios they can approach their existing lender and ask for Consent to Let. That’s asking the lender for permission to let out the property for a period of time.
It will be up to the lender if they’re prepared to do that. If they make any charges that’s entirely discretionary. With Consent to Let, although you’ve got a residential mortgage on the property, you can go ahead and rent it out.
In terms of living in your own Buy to Let property, that’s not what it’s designed to do. If you take that mortgage out on day one and you move in on day two, that would be deemed mortgage fraud.
However, if you have a Buy to Let and you want and you want to move into it, you could try and move it onto a residential mortgage.
Should I choose interest only or repayment on a Buy to Let mortgage?
You can choose either option. There’s no qualifying criteria for that with most lenders. What you do will depend on your exit strategy and whether you ever want to own the property outright. Your tax situation is also relevant.
Anybody that’s looking to invest in property is well advised to speak to an accountant to discuss the impact of tax. Some prefer to keep as much of the income aside as possible to cover their tax bill. Then they might seek to pay down some of the mortgage with overpayments.
It will come down to a choice of whether you ultimately want to own the property outright and whether it’s the right thing to do tax-wise.
How many Buy to Let properties can I own? Is there a limit?
There isn’t necessarily a limit, but some lenders have one and this does change. A lender might not want to be exposed to any one landlord beyond a certain amount of money or a certain number of properties.
Those limits do tend to be quite big. If somebody just wants one or two rental properties that’s usually fine. But if somebody’s got 10 properties in their portfolio, a lender might not want to provide mortgages for more than five of them.
If you own more than four Buy to Let properties, you’re classed as a portfolio landlord in the eyes of most lenders. There are different criteria for assessing portfolio landlords, as the risk factors change.
I tend to think you’re better to either keep under the four and be a small landlord. If you’re planning to be a portfolio landlord you will need a lot of properties to make it worth your while.
What else do we need to know about Buy to Let Mortgages?
In this area, more than any other, it’s essential to have an advisor who really gets to know you, your objectives and your goals.
Buy to Let has become a lot more criteria based. Previously, it was very straightforward – if you had the right level of deposit it was simple. There’s now lots of different calculations to factor in, and lots of different ways you can structure the finance. So it really is beneficial to have an advisor on your team.
Your property may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
Some buy to lets are not regulated by the Financial Conduct Authority.