Although similar to a regular mortgage, Buy to Let
mortgages (BTL) have their differences.
The differences occur in deposits (you’re required to have a high deposit when buying a BTL property, usually 20%-40%), product styles (BTL mortgages are often investment only), age restrictions and investing style.
You can invest in one of two ways – in your personal name
or via a limited company.
There are pros and cons to both options but there has been an increase of investing through ltd companies in recent years due to the potential tax savings this option presents.
A recent study has revealed that landlords are increasingly investing in buy-to-let properties through limited companies, with 44% of completed buy-to-let mortgages purchased via this route; that’s an increase of 42% from the previous quarter.
In addition to this the number of buy-to-let lenders offering loans to limited companies has also increased, rising by 47% over the past 12 months.
This significant increase is in response to changes in buy-to-let tax regulations.
Prior to April 2017, landlords who also owned homes in their name could deduct their mortgage interest from their rental income before paying income tax. This meant that the income landlords had to declare to HMRC was much lower than their rental income, keeping their costs down and keeping many landlords within a lower income tax bracket.
However, this is gradually changing with the amount that can be written off dropping by 25% each year. By 2020, all rental income will be eligible for income tax, with tax relief being gradually reduced until only basic rate relief (20%) is available. This doesn’t apply, however, if the buy-to-let property in question is owned through a limited company, as the property is then viewed as a business and all expenses can be written off.
Rather than paying income tax as an individual, limited companies pay corporation tax at 19%. The government announced a further reduction to the Corporation Tax main rate (for all profits except ring fence profits) for the year starting 1 April 2020, setting the rate at 18%. When bought through a limited company a landlord can still take an income from their rental property, in the form of dividends. They will only pay tax on the number of dividends they take, theoretically cutting their tax bills significantly (and tax will only be paid once the funds are withdrawn from the company accounts, allowing the owner to decide when to take the hit on their income.)
Of course, there can also be a number of potential downsides to investing in property via your limited company and it’s important that you are aware of them, as well as the potential benefits.
To dig deeper into buy to let mortgages, we’ve asked one of our experts, Senior Mortgage Consultant, Matthew Thompsett, to answer a few burning questions around buy to let mortgages and shine a little light on how these mortgages work and why they can be a good option to go for.
How much can I borrow to fund a buy to let property purchase?
It depends on the Lender. There are two ways that borrowing can be determined; a full affordability assessment or rental income assessment. In an affordability assessment, the lender will determine your maximum borrowing from your monthly surplus personal income. If the lender undertakes a rental income assessment, the maximum borrowing will be determined by stressing the projected rental income received per month to ensure the mortgage payment is covered by the rental. The maximum borrowing against a property is unlikely to go above 80% loan to value for a buy to let mortgage.
Who can apply for a buy to let mortgage?
You must be a minimum of 18 years old but apart from that, anyone can apply. First Time Landlords are acceptable to several lenders.
What documents are required?
Typically, the following documentation will be requested:
- Proof of identification (Name and Address ID)
- 3 months bank statements
- Proof of Income
- ARLA letter to confirm potential rental income (this can be obtained from an estate agent)
- Lender specific documentation such as declaration and direct debit mandate
Where can I get a buy to let mortgage?
Buy to Let mortgages can be secured for properties in England, Scotland, Wales and Northern Ireland.
How do I work out what return I can get from a buy to let property?
The best way to work out your rental yield is calculated by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property. The best way to determine this in a monetary value is to take the yearly money spent on the property (mortgage, upkeep etc..) away from the rental income received per year. For the tax implications, it is always best to speak to an accountant or tax adviser.
What happens if there’s no rent coming in?
The lender will expect the mortgage payments to be made on time, so it is important that you prepare for periods where your property is untenanted. Most landlords will keep a small pot of savings to ensure the mortgage payments are met during those times.
I have an existing rental property. Can I release some of the profit made from my house?
Yes, some lenders will allow you to release equity from your property ensuring that you meet their loan to value limits and the mortgage is deemed affordable. You would have to give a reason for the equity release and undergo full underwriting to release the funds.
Will I have to pay a higher interest rate than on a residential mortgage?
Typically, Buy to Let rates are higher than residential rates. This is due to the lenders seeing the mortgage as more of a business transaction rather than a necessity (a residential mortgage is needed so you have a place to live). However, you can access interest only with a buy to let mortgage which means that you can reduce the monthly payments significantly to ensure that an adequate rental yield is achieved.
What will happen to my mortgage rate after the initial scheme expires?
If you did nothing and left the mortgage alone, you would go on the lender’s standard variable rate. This rate is usually higher than the initial rate you secure with a lender and will continue until the end of the mortgage term. It is usually variable so it can change thought the term of the mortgage. To avoid going onto the standard variable rate, you can remortgage to another lender or normally choose a new rate from your current lenders range. However, the current lender will more than often offer a high retention rate in comparison to a remortgage.