What is a buy to let mortgage? - buy to let mortgages explained UK landlords that wish to invest in buy to let properties in the United Kingdom can use their own money or leverage debt as a means of building a more extensive property portfolio. Homeowners would use a residential mortgage, but landlords need to use a buy to let mortgage instead. As the name suggests, you need this type of product to purchase buy to let properties. Typically landlords looking to obtain a buy to let mortgage need to be 18 years of age but may be increased to 21 if you are a joint mortgage applicant or the bank’s policies. The types of buy to let mortgages will be used to finance your purchases of Flats Whether that is in a block or single flats Houses Single buy to let properties or Houses of Multiple Occupation Furnished Holiday Lets (FHLs): You may find that you need a particular type of mortgage for these types of properties Buy to let mortgages are regulated by the Finance Conduct Authority (FCA) Consumer buy-to-let mortgages are regulated by the Finance Conduct Authority (FCA), similarly to residential mortgages. Please note that your investment may be at risk if you cannot keep up with your mortgage payments. Before I go on, it is important to stress that this page does not constitute financial investment advice nor advice on any buy to let mortgage products. Buy to let mortgages for UK landlords - Whats the structure? Many of our UK landlord investors ask, “can I remortgage my house to buy another property as a buy to let? The simple answer is yes, but you need to work with a mortgage broker to understand the implications. We often see that clients pay less interest on a residential home mortgage to purchase a buy to let property investment. The good news is that residential home mortgages still benefit from tax relief if used to purchase a buy to let property investment. A buy to let mortgage has three main components: Deposit This is the amount of money that you must pay towards the buy to let property investment. The rest of the money will come from the bank as a debt, typically secured against the property. Interest The amount of interest that the bank will charge landlords for a buy to let mortgage. The rates of interest will vary dependent on a) your finances, b) the amount of deposit that you are putting down, c) the type and condition of the property d) how much rental income will be generated from the property Term A mortgage term is how long the bank will work with you under the product. Your mortgage capital may have been repaid at the end of the term, or you may need to refinance the property to secure a new buy to let mortgage. Buy to let mortgages – Interest Mortgage interest may also be split into two components. Fixed and variable rates of buy to mortgage interest. A fixed-term mortgage interest rate means you pay the same amount of mortgage interest each month for the life of the buy to let mortgage product. A variable interest rate may fluctuate from time to time and depends on the Bank of England interest rates and the banks own policies. You may have also come across the term Loan To Value or LTV. This is where the bank will look at the property valuation and the amount of money they wish to lend. How to get a buy to let mortgage – Buy to let mortgage application There are buy to let mortgages for the self-employed. Typically, our self-employed clients need to show that they have been profitable for the past few years. We have seen our clients being asked for 3 years worth of self-assessment tax returns and limited company profit statements. There are also buy to let mortgages for landlords that are full time. Similarly to our self-employed clients that want a buy to let mortgages, our UK landlord clients will also need to show their tax returns with their mortgage application. Buy to let mortgages minimum deposit is typically 25% for our UK landlord clients. There are occasions when the deposit is more/less than the mentioned 25%. We have seen some clients that have obtained a buy to let mortgage with a 20% deposit, but some have been asked for 40%. The amount of deposit that a landlord needs to put down varies considerably. This is why our landlord accountants suggest to our clients that it is vital to work with a mortgage broker who invests in property themselves. Buy to let mortgage interest rates will also vary. The level of deposit and mortgage interest rates that you can achieve will be dependent on: Buy to let mortgage criteria Finances Your financial situation and credit score Property The type and condition of the property Banking policies Risk appetite and policies in place to loan money Buy to let mortgage criteria The demonstration of taxable earnings will need to be increased according to the amount of debt that the landlord wishes to borrow. For instance, a UK landlord that wishes to borrow £1,000,000 will need to show self-assessment tax returns that show taxable earnings of circa £75,000. Our clients have been asked by their mortgage broker to show earnings of up to 5 times the amount they wish to borrow. This translates to the mortgage debt being circa 20% to 25% of the taxable profits of the property investor. People with bad credit can get a buy to let mortgage. The best thing to do is get a credit score report and see what can improve your credit score before starting a buy to let mortgage application. There are two types of mortgages that UK landlords can obtain: – Buy to let mortgages interest only: You will pay monthly interest, but the payments to the bank are lower. The capital is not being repaid and will be outstanding at the end of the mortgage term. – Buy to let mortgages with a capital repayment: The amount of money you pay each mothy is more than interest-only mortgager products. This is because you are paying down the capital debt you owe to the bank each month. We often see that our clients need to show that they earn £25,000. This £25,000 buy to let criteria can be taken from: Buy to let mortgage affordability criteria Self employed £25,000 profits made by someone that is self-employed with 2-3 years worth of self-assessment tax returns Landlords £25,000 profits made by someone that is a full-time landlord with 2-3 years worth of self-assessment tax returns Employees Earning £25,000 from their job, be it full time or part-time and have worked there for at least 6 months. Mortgage interest tax-deductible Optimise accountants, and their landlord tax specialists work with clients to complete their property tax returns each year. Buy to let mortgage interest relief before Section 24 was 100% tax-deductible. For every £1 of buy to let mortgages, interest would be used to reduce your property profits and tax liabilities to HMRC. Section 24 mortgage interest relief cap means that mortgage fees are no longer fully tax-deductible. Section 24 mortgage interest relief cap provides you with a 20% rax reducer on the mortgage interest costs. For every £1 of buy to let mortgage interest, you benefit from 20p tax credit. Are mortgage payments tax deductible? Can you offset mortgage payments against rental income? This is another set of typical questions we see from our property investors. Only buy to let mortgage interest is tax-deductible. Mortgage capital repayments are not tax-deductible. Therefore, landlords need to separate the buy to let capital repayments from the buy to let mortgage interest costs. In conclusion, you can deduct mortgage interest on a rental property, subject to Section 24, but not the mortgage capital repayments. It is quite common for our buy to let tax advisors host conversations between the client and their mortgage broker to discuss products and the tax structure to hold the property. Buy to let mortgages in a limited company As a result of Section 24 mortgage interest relief cap, many landlords that purchase buy to let properties are using a limited company. Buy to let mortgage interest is fully tax-deductible within a limited company. The amount of tax landlords pay within a limited company is often less than the tax they would pay on rental profits on their self-assessment tax return. That said, can you obtain buy to let mortgages within a limited company? Our buy to let mortgage specialists have informed us that landlords can get buy to let mortgages within a limited company. The level of interest charged and depots required depends on their experience and the number of properties they already own. According to the mortgage brokers we work with for our UK landlord clients, a buy to let mortgage through a limited company does take more time. This is because the banks wish to scrutinise the numbers of the limited company and the individuals that own the tax-efficient stricture.
