Buy to let mortgages for landlords

Simon Misiewicz

Expat & Property Tax Specialist

1st February 2022

Buy to let mortgages for landlords

Buy to let (BTL) mortgages are for landlords who want to buy property to rent it out.

The rules around buy to let mortgages are similar to those for regular residential mortgages, but there are some key differences.

Landlords will often use buy to let mortgages buy their property investments.

Section 24 means that tax reliefs are limited to the interest only.

What are the basics of buy to let mortgages for landlords?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that a BTL mortgage is usually required for a first-time landlord or professional property investor.

Traditional residential mortgages are only for borrowers who live in the property being purchased.

If a landlord rents out a property paid for from a residential mortgage, they will likely break the mortgage agreement unless the lender has agreed to a consent-to-let.

BTL mortgages are home loans that allow a landlord to borrow a sum of money to buy a property which is then paid back plus interest in monthly instalments over a set number of years.

Like residential mortgages, the interest rate on a BTL mortgage can be fixed or variable.

A fixed-rate guarantees that the interest rate and repayments remain the same during the fixed term.

The interest rate can go up or down with a variable rate BTL mortgage.

How does a buy to let mortgage work?

Some of the critical differences with buy to let mortgages include:

– The fees tend to be higher.

– Interest rates on BTL mortgages are often higher.

– The minimum deposit for a BTL mortgage is usually 25% of the property’s value.

– Most BTL mortgages are interest-only. Landlords pay the interest monthly but not the capital amount. At the end of the mortgage term, you repay the original loan in full.

Advising, arranging, lending and administering BTL mortgages for consumers are covered under the same laws as residential mortgages and is regulated by the Financial Conduct Authority (FCA).

The maximum a landlord can borrow is linked to the rental income.

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

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

It is advisable to talk to a mortgage broker before taking out a BTL mortgage to get the best deal.

What does buy to let mortgages cost? 

When deciding how much money landlords can borrow, BTL mortgage lenders look at the rental income a property can generate and not the landlord’s income from their job.

Affordability is calculated using an ‘interest cover ratio’ (ICR).

The ICR is the minimum ratio between the expected rental income of the property and the landlord’s mortgage payments, tested at a representative interest rate. This is usually 5.5%.

This is called a ‘stress test’ as most mortgage interest rates are not that high.

Most BTL mortgage lenders require a minimum ICR of 125%, although some may require up to 145%.

If the rent is insufficient for the required ICR, some lenders will allow the landlord’s income to be considered.

Some BTL mortgage products will have a flat fee, while others will charge a percentage of the loan amount.

In general, a flat fee works out better for large loans and a percentage fee better for smaller BT mortgages.

Some buy to let property investors choose interest-only because the lower monthly payments make it easier to meet the ICR required.

There is also the option to sell the property at the end of the term and repay the capital borrowed from the proceeds.

Some of the current buy to let mortgages available can be viewed here.

How does a landlord qualify for a BTL mortgage? 

Some BTL mortgage lenders will only lend to landlords who already have a residential mortgage in the UK.

A handful of providers will lend to first-time buyers whose first property purchase is for rental purposes.

Some lenders will only lend to landlords over the age of 25.

It is also common to have a maximum age limit when the mortgage ends.

Some lenders also require you to have a minimum personal income of £25,000, and it is usual for any lender to require a landlord to have a good credit record before agreeing on a BTL mortgage.

The purchased property needs to be in good condition and be let as a single unit, rather than per room on a multiple occupancy basis.

Multiple occupation property lets require a different type of BTL mortgage.

A smaller specialist BTL mortgage lender might offer a better deal than a high street bank.

Mortgage brokers will know the best lenders to approach for your deposit level, property type and personal circumstances.

A BTL broker can also work out the best deal for you based on various fees and interest rate combinations.

You can get a BTL mortgage under the following circumstances:

– You want to invest in houses or flats.

– You can afford to take and understand the risks of property investment.

– You are not stretched on other borrowings or credit.

– You already own your own home, either outright or with an outstanding mortgage.

– You earn over £25,000 a year.

– You’re under a certain age, typically 70 or 75.

The minimum deposit for a BTL is usually 25% of the property value but can rise to 35% if you buy a flat or new build.

This is significantly different to residential mortgages, where it is possible to put down a deposit of 5% of the purchase price.

Each BTL mortgage will have a maximum loan-to-value (LTV).

This is the maximum proportion of the property’s value you can borrow as a mortgage.

The bigger your deposit, the lower the LTV.

The lower your LTV, the cheaper your BTL mortgage will be.

The BTL mortgages with the lowest rates will carry a maximum LTV of 60%.

This means you’d need a 40% deposit to get the best deals.

What is the impact on landlords of Section 24? 

Before 2018 property investors were allowed to offset 100% of the mortgage costs against their property income.

From 2018 until 2021 there was a further reduction to 75%.

In the current tax year, no allowance can be made to offset mortgage interest against property rental income.

In place of mortgage interest being a tax-deductible cost will be a 20% tax reducer.

This reducer is calculated as 20% of the lesser of:

– Mortgage interest costs.

– Property profit (excluding mortgage interest as a cost).

– Taxable income as a whole.

The reducer is set at 100% of the above values.

Please read this article to find out all you need to know about How Section 24 mortgages interest relief affects UK landlords.

Can landlords get tax relief on a residential mortgage? 

Since April 2020, landlords can no longer deduct any of the mortgage expenses from rental income. Property investors now receive a credit based on 20% of the mortgage interest payments.

A mortgage used to purchase a principal residence is not a business loan, and no mortgage interest relief is available.

A loan taken out to fund a property letting business is a business loan, and the mortgage interest is an allowable expense that can be set against rental income.

The government has set out clear guidelines on the rules when renting out a property.

Should I purchase buy to let properties in a Limited Company?

One of the main reasons landlords use a Limited Company as BTL property investors are to reduce their tax liabilities.

A Limited Company has a corporation tax rate of 19%.

The income tax rate for high rate is 40% for those earning more than £50,270, while those earning more than £150,000 are liable to a 45% rate.

Buying properties for investment using a Limited Company also minimises risk.

If there is a legal case against you as a sole proprietor, your assets could be at risk if you are found guilty.

A Limited Company that is prosecuted runs the risk of assets being taken away, but this does not endanger the personal assets of any company shareholders.

This is provided they have not signed a personal guarantee.

Read this article to find out what landlords need to know about using a Limited Company to buy property.

What do landlords need to know about buy to let and tax?

CGT on BTL second properties is charged at 18% if you’re a basic rate taxpayer. This rate increases from 18% to 28% as a high-rate taxpayer.

With other assets, CGT basic rate is 10% and a higher rate up to 20%.

If you sell your BTL property for profit, you will pay CGT if your gain exceeds the annual threshold of £12,300.

Couples who jointly own assets can combine this allowance, allowing a gain of up to £24,600 during the 2021-22.

Landlords can reduce their CGT bill by offsetting costs like Stamp Duty, solicitor and estate agent fees or losses made on a sale of a BTL property in a previous year by deducting these from any capital gains.

Any gain from the sale of your property should be declared on your Self Assessment for that year.

The income you receive as rent is liable for income tax. This could be taxed at 20%, 40% or 45% depending on your income.

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

The ending of mortgage interest relief with the introduction of tax credit based on 20% of the interest element of your BTL mortgage payments means that many landlords could be paying more tax than before.

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