Buy to Let Mortgage Guide 2018
Can I get a buy to let mortgage as a contractor? Yes, you can! Buy to Let mortgages (BTL) are usually more expensive than regular mortgages, and because of the nature of letting, can be a risky business in terms of earning potential. However, with the right information and guidance, investing in a Buy-to-Let property can be the perfect way for a contractor to boost income.
What’s in the guide?
- How do Buy to Let mortgages work
- How much you may be able to borrow
- Is letting a good investment
- What are the risks?
- Things to consider before buying
- Buy to Let properties and tax
How do Buy-to-Let mortgages work?
Although similar to regular mortgages, there are some differences. Usually on BTL mortgages, interest rates tend to be higher and the minimum deposit for a property is on average 25% (although it can range from 20 – 40% depending on the lender). The application fees for the mortgage will also tend to be higher.
Most BTL mortgages offered by lenders are Interest-Only, which means you don’t pay anything on the lump sum of the money borrowed, only the interest, and pay back the outstanding amount at the end of the term.
Most lenders will not offer you a BTL mortgage if you don’t already own your own home or if you don’t have an existing mortgage on a property. You must have good credit as well as earn a minimum salary.
Lenders will have a maximum age for BTL mortgages, usually 70 – 75 being the upper limit for when taking out a 25-year mortgage (i.e. if the upper limit is 70, then you must be under 45 to be accepted for the 25-year term).
How much can I borrow?
The maximum you can borrow is linked to the amount of
rental income you would expect to receive from the property. Typically, a lender will expect the rental income to be 25 – 30% higher than the mortgage payments.
Calculator: Buy to Let
Is letting a good investment?
Investing in a BTL property provides you with extra income on top of what you are already earning, as well as benefitting from the property if the value rises over the time you own it. Unlike stocks and shares, you have more control over the investment, such as modernising and letting efficiently, which can all influence how the property can increase in value.
However, it is good to keep in mind that most landlords will not earn a huge profit from the rental income alone; it is a long-term investment that is usually earnt through the sale of the property as they rise in value across time. However, with the uncertainty in the housing market since the credit crunch, investors must be aware that the value of a property can also decrease.
As a landlord you have to be aware of other expenses, including Landlord Insurance and general maintenance costs.
What are the risks?
The main risk when deciding to invest in a BTL property is the danger of assuming your property will always be occupied by tenants paying rent. However, in reality there are times when your property may be unoccupied, leaving a period where rental income is zero. In cases like this, it is a good idea to make sure you have savings to cover these void periods, to ensure the mortgage is paid and the house is not repossessed.
Things to consider before buying
Before buying a property to let you should consider the following:
Are you hoping to attract families, students or couples? Once you have decided this, it should help you choose a suitable location and property type.
Does the property need work doing on it? If so, you must have enough money to cover the rent while you have no tenants.
Is the property near shops, schools, public transport? Consider what your future tenants might be after. This way you hopefully won’t be left with an empty house for long periods.
How much are similar properties charging? You are not guaranteed to get the amount you set and your property is likely to rise in value in the future.
Will you look after the property whilst it is being occupied, or will you outsource to a letting agent that will do so at a cost?
The costs of buying
Investing in a Buy-to-Let property incurs the regular costs of any other property. These include:
This is a fee the lender charges for setting up your mortgage. The amount you can expect to pay varies depending on what lender and what property you are purchasing. It could be a set amount or a percentage of the loan.
This typically includes buildings insurance to protect against structural damage, and contents cover if you decide to rent out a furnished property.
This is a fee the lender charges for carrying out a valuation of the property. Its purpose is to reassure the lender that it is a good investment to lend on. The cost varies depending on the lender and the size of the property.
This is a fee the solicitor or conveyancer will charge for the legal work they carry out. This includes conveyancing and searches on the property. The cost varies depending on the solicitor and the property.
Buy-to-Let properties and Tax
As well as expenses you have to account for when purchasing, there are also taxes post-purchase for which you will need to make provision. Below is an overview of the current considerations, however, tax rules will change so it is best to seek independent tax advice.
Capital Gains Tax
If you decide to sell your property, and it sells for a profit, you are likely to pay Capital Gains Tax if it exceeds the threshold set by Government. You are also likely to pay this tax if you transfer the property to anyone other than a spouse or civil partner.
The rental income you earn monthly that exceeds the mortgage interest payments are also liable to Income tax.
As with other assets you own, any BTL property is counted towards the total value of your estate for Inheritance Tax purposes. It is set by the government at 40% when your total estate is above the nil-rate band of £325,000.*
In April 2016, Stamp Duty increased for those purchasing additional property, including those looking at BTL. Most BTL properties will now incur an additional 3%** surcharge above the original Stamp Duty percentages.
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