A buy-to-let or buy-to-rent mortgage is an investment opportunity that intentionally purchases a property to be rented out to tenants for profit. Investing in property is a very effective way of generating a regular income; however, it is important to be aware of the risks involved and to get the right advice.
What is the Difference Between a Buy-to-let and a Residential Mortgage?
Buy-to-let mortgages are different to ordinary mortgages in a number of ways, which it is important to understand if you are thinking of investing in property. They are not regulated by the Financial Conduct Authority (FCA), however, they are still subject to rules laid out in the Mortgage Credit Directive. There is a subset of buy to let mortgages called consumer buy-to-let properties, which are regulated by the FCA. A consumer buy-to-let is defined as,
This distinguishes between ‘accidental’ landlords such as those who inherit a property or move for work and rent out their original home, and ‘professional’ landlords who buy with the intention of building a property portfolio.
Another two commercial mortgage niches are houses in multiple occupancy (HMOs) and holiday lets. HMOs are often regulated by local authorities and involve renting out rooms with shared facilities such as kitchens and bathrooms. This is a specialist area of property investment with different financial issues and accordingly specialist mortgage requirements. A holiday let property is exactly that – a property let for a holiday. There is little owner occupation and tenancies are always short (usually less than 30 days at a time to any single tenant). These dynamics determine how a property is let and managed, which is very different from a conventional buy-to-let property. Usually holiday lets rely on the earning potential of the owner but in some cases the investment case is sufficiently strong that the owner’s financial position is a secondary condition.
Crucially it is important to remember that buy-to-let properties, in whatever guise, are business assets and accordingly, there are tax matters to consider. Interest is tax deductible (at least in part) and rents are taxable.
Buy-to-let Mortgages are Usually Interest Only.
An interest only mortgage means that you pay off the interest and not the capital. This reduces your repayments; however, at the end of the mortgage, you will not own the property outright and will have to pay off the balance. This means either selling the property, remortgaging or having an alternative method of repayment. In London the proportion of rent to the capital value of the property is low and accordingly interest only mortgages are often the only types of mortgages available for buy-to-let properties.
You will Probably need a Larger Deposit
There is a greater risk for lenders with this type of mortgage, which is why a larger deposit is usually required, which is usually 25%, but this can vary from 15% to 40%. The more you put down as a deposit, the better the interest rates you’ll be able to get. Following recent tax changes, buy-to-let property is increasing owned by a company through which it is often possible to raise more funds, which requires a lower deposit.
Why you Should use an Independent Broker for a Buy-to-let Mortgage
Unlike residential properties, most buy-to-let mortgages can only be accessed by going through an intermediary. When researching independent mortgage brokers it is important to find out whether they are limited to the lenders they can suggest, or whether they have access to the full range of products available. As buy-to-let mortgages are a form of commercial mortgage underpinning a commercial business, it is also advisable that your broker understands the specialist aspects of such a property.
How much can I Borrow for a Buy-to-let Mortgage?
The amount you can borrow depends on the rental income of the prospective property. The lender will calculate the rent to interest (RTI), which varies considerably between lenders. For conventional buy-to-let mortgages, the income received from rent usually has to be 145% of the monthly mortgage payments for an individual purchaser, or 125% for those applying as a limited company. In addition the assumed monthly mortgage payments are stressed at higher rates, further impacting on affordability. For higher earners it has recently become common that earned income can be used to ‘top up’ the rent to the desired level.
There are a lot of things to consider and research when considering a buy-to-let mortgage. The rental income should cover the mortgage repayments plus expenses such as insurance, management fees and repairs with some headroom for unforeseen costs. You should also factor in void periods, where the property does not have paying tenants. This all needs to be calculated to ensure it is a viable investment, which is why it’s advisable to talk to a mortgage advisor to understand the risks involved.
Johnsons in Ealing, West London, puts the client’s needs first and provides robust solutions for even the most complex situations. They specialise in a range of financial services, including independent mortgage advice, tax and accountancy services.