Buy To Let Mortgages explained
Buy To Let properties continue to be a popular investment choice. From buy to let mortgages, rental yield, tax implications, finding the right property and landlord responsibilities, we explain everything you need to know.
What is Buy To Let?
Buy-to-let is a property which is purchased to let out in order to produce a rental return and income stream. It can also grow in value, producing a capital gain when you sell. The rent on a buy-to-let property should cover:
- the cost of the mortgage
- expenses, typically building insurance, repairs and any letting agent’s fees
Buy To Let mortgages
Unless you are a cash buyer, you will need a buy to let mortgage. A standard residential mortgage only applies if you plan to live in the property. With buy to let mortgages, you can rent out your property to tenants. If you plan to rent out the property, most lenders will not allow you to do this with a conventional mortgage.
Buy to let mortgages are a lot like residential mortgages with some key differences:
- The amount you can borrow on buy to let mortgages is based on how much rent the property can generate versus the cost of the mortgage. Typically, lenders will want your expected rental income to meet at least 125% of the monthly interest payments on the loan.
- Buy to let mortgages may also require you to have a minimum salary, typically £20,000-£25,0000.
- Interest rates are higher on buy to let mortgages than standard mortgages due to the greater risk involved.
- The minimum deposit required for buy to let mortgages is generally 20-25% of the purchase price. The cheapest deals require a deposit of 40% or more.
- Arrangement fees on buy to let mortgages can be higher than on conventional mortgages. These are sometimes calculated as a percentage of the amount you borrow, rather than a flat fee.
Get fee free mortgage advice from our partners at L&C. Use the online mortgage finder or speak to an advisor today.
Is now a good time to get a Buy to Let property?
While buy to let has always been a popular way of having a second income, there are a number of factors to weigh up with this investment option.
The stamp duty surcharge for buy to let properties and high house prices have been two major financial deterrents for those considering buy to let.
However, rising house prices have also resulted in increased demand for rental properties with people priced out of buying resulting in higher rents. Rising rents and very low mortgage rates means it can still be an attractive time to invest in a buy to let property.
Fueled by the temporary stamp duty holiday over the past year, buy to let mortgage borrowing has recently reached a record high. There were 2.02 million outstanding buy-to-let mortgages at the end of June 2021, up from 1.65 million at the end of 2014, according to the banking trade body UK Finance.
Buy To Let tax implications
Stamp duty on buy to let properties
The stamp duty surcharge on additional homes is back in effect from 1st Oct, 2021.. The stamp duty surcharge is 3% stamp duty on properties up to £250,000. To understand the exemptions, how much you could pay and common questions see our guide on stamp duty for buy-to-let. There is also a stamp duty surcharge on additional homes such as buy to let properties in Scotland and Wales. For more details on the additional stamp duty charges, see stamp duty for second homes or use our stamp duty calculator.
Buy to Let income tax relief
In the past, landlords were able to offset mortgage interest and buy to let mortgage arrangement fees against their income tax bills at up to 45% for higher earners. However, this tax relief was phased out between 2017-2020 and has been reduced and capped at 20%.
Wealthier, higher tax paying landlords will, therefore, be the most affected. Landlords could be up to £2000 per year worse off than they were, based on typical rents. Cash buyers and investors in the 20% tax band are least affected.
Capital gains tax on Buy to Let
If your buy to let property rises in value by more than your capital gains tax (CGT) allowance by the time you sell it, you’ll have tax to pay. The tax-free allowance is currently £12,300 per person in 2020-21. It can be a good idea to get independent tax advice.
Buy To Let rental yield
To assess if buy to let is financially viable and when applying for a buy to let mortgage, you need to know a property’s rental yield. This is the rental return a property generates. Average yields in the UK are roughly 5%.
In its simplest form, the rental yield is calculated by dividing the annual rental income by the purchase price, then multiplying by a 100, to give the gross rental yield as a percentage.
For example, annual rent of £7200 divided by purchase price, £145,000 multiplied by 100 gives a gross yield of 4.9%. If you don’t know what the rental income will be, ask the estate agent who is advertising the property.
If you’re taking out a buy-to-let mortgage to purchase a property the lender will want to know you can secure enough rent to make the repayments. Under strict new rules imposed by the Prudential Regulation Authority many lenders have increased their rental requirements in order to reduce risk. This means landlords must be able to achieve higher rents in order to secure the mortgage. However, some lenders will allow a landlord to use their own disposable income to meet any rental income shortfall so it’s important to shop around.
Choosing the right Buy To Let property
The property adage, location, location, location, is doubly important with buy to let.
Most people travel to work and the best buy to let investments are generally those within a fifteen minute walk of a train or tube station.
Find a property to suit local demand. A funky flat above a brasserie might suit commuting professionals but not a young family.
Resale property is generally bigger and cheaper to buy than new build.
Be wary of buying into a block of flats with many other buy to let investors. Too many flats to let at the same time, means rents could fall or worse still, voids. It can also make selling harder.
Buy To Let conveyancing
Buy-to-let conveyancing is the legal process of transferring ownership of a property to you. It begins when your offer on a property is accepted and runs through to the day you receive the keys.
The conveyancing solicitor should make sure there are no restrictions on renting out the property. They should also be able to advise you on wider issues such as tax implications or environmental and planning law. It is a good idea to explore any questions you have about future plans for your investment property with your conveyancing solicitor. Compare conveyancing quotes from regulated and reviewed conveyancing solicitors that cover your area.
Buy To Let landlord responsibilities
Being a landlord comes with a wide range of legal responsibilities which include:
Contract – You must provide your tenant with a contract, generally an AST (Assured Shorthold Tenancy). This gives tenants the legal right to live in the property for a fixed period or a rolling term.
Right To Rent – All landlords are now responsible for checking their tenants have the right to rent in the UK. Give every tenant a copy of the Government’s How to Rent booklet.
Tenancy Deposit Protection – Protect your tenant’s deposit in government backed schemes such as DPS (Deposit Protection Service), TDS (Tenancy Deposit Scheme) or mydeposits. Give your tenant details of where their deposit is protected.
Gas and Electrics – Check gas appliances once a year using a gas safe registered tradesman and give tenants a copy of the safety certificate.Wiring and electrical appliances also need to be checked regularly.
Energy Performance Certificate – Your property must have an up-to-date EPC before it can be marketed and you must give a copy to your tenant. An EPC is valid for ten years. Get quotes for an EPC here
Fire – Furniture and soft furnishings must pass fire safety regulations. Check for fire retardant labels. Fire alarms have to be fitted. Fit a carbon monoxide alarm in any room with gas appliances.
Maintenance – as well as meeting legal requirements, you’ll want to maintain your property to a good standard for your tenants and in order to protect your investment. Many landlords manage their own properties. It can be helpful to join a representative organisation such as The National Landlord’s Association or The Residential Landlord’s Association. Get to know good plumbers and builders to help you manage your property smoothly. Our Find a Tradesman service can connect you to local tradespeople to get a range of maintenance jobs done.
- Step-By-Step Guide to Buying a Home
- Buy to let remortgaging
- Buying a second home
- Investing in property
- Capital gains tax when selling a home
- Let to Buy Mortgages explained
- Buy to let conveyancing
- Bridging loans explained
- Stamp duty for buy to let
- Stamp duty for second homes
- How to make your home more energy efficient