Buy to let mortgages are specifically designed for people looking to invest in a property and become a landlord, rather than live in the property. Typically, you’ll need a large deposit to secure a buy to let mortgage and the interest rates may be slightly higher than traditional mortgages. To find out more about buy to let mortgages, read our guide and use our calculator below to compare the best buy to let mortgages.
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A buy to let (BTL) mortgage allows you to buy a property and rent it out. By doing this, you become a landlord. You cannot live in a property that you buy using a buy to let mortgage.
Buy to let mortgages are similar to standard residential mortgages but can be much harder to get.
You can increase your return on a buy to let investment by improving the property – giving you a bit more control than you have over how much you earn from stock market investments, which are dictated by market performance, or savings accounts where the interest rate can change.
Most buy to let mortgages are interest only. To secure an interest only mortgage, you need a way to pay off the initial amount borrowed, known as the principal, at the end of the mortgage term. This is called a repayment plan.
With non interest-only buy to let mortgages, investment accounts are the most common form of repayment plan. But for buy to let landlords, the easiest way to repay the principal is to sell the property at the end of the mortgage term - as long as house prices have not gone down, of course.
You may need to be over a minimum age to get a buy to let mortgage. Most lenders will limit you to say 3 or 4 buy to let mortgages, or a maximum debt of £3 million, through them at any one time, although this doesn't necessarily mean you cannot take out more buy to let mortgages with another lender, though. The criteria for a buy to let mortgage depends on your individual circumstances.
One big advantage of BTL is that you can earn in two different ways: rental income and property value increases. However, how much money you can make as a buy to let landlord depends to a large extent on the property - and rental - market.
Currently, there is a lot of uncertainty surrounding property prices and the economy in general – stock markets are extremely volatile and with the Bank of England dropping in response to Covid-19, you will earn next to nothing in most savings accounts.
Given that mortgage rates are also low, investing in property via buy to let may currently seem an attractive option - especially if you use our buy to let mortgage comparison tables to find the best deal. But recent changes to buy to let property tax rules have made it harder to make a profit, because you have to pay more stamp duty and can no longer claim tax relief on your mortgage interest payments.
Before you decide to take out a buy to let mortgage to invest in a property, it’s worthwhile considering the risks you’ll be exposed to. Make sure you could afford mortgage repayments if:
Generally speaking, a buy to let mortgage lender will require a deposit of at least 25% (75% LTV) to 40% (60% LTV). Buy to let mortgage rates are also generally higher than the interest rates on standard home loans.
When you’re negotiating a mortgage, the lender will ask about your expected rental yield.
Rental yield is the annual rent received as a percentage of the property purchase price. For a property costing £240,000, an annual rent of £12,000 would mean a yield of 5%.
Try to aim for an 8% rental yield to ensure there's enough cash flow to cover expenses, maintenance costs and problems.
In the case of a BTL property, the rental yield is a measurement of how much cash it generates each year as a percentage of the asset’s value.
The gross yield is the return before expenses, whereas the net yield is the return after costs. The net yield provides a truer picture of profit for a BTL investor or landlord.
If interest rates rise and you are on a variable rate mortgage, your monthly repayments could go up. This does not necessarily mean you could just increase the rent to cover the difference.
Your payments will stay the same on a fixed rate buy to let mortgage, but could increase when the deal ends. So either way you need to ask yourself: can you afford higher interest rates?
Factor into your budget your property being empty for two months a year as insurance. You should also budget for repairs, new furniture, and maintenance. And try to set aside enough to cover unexpected problems, such as flooding or roof repairs.
You should also be prepared for rogue tenants who damage the property or leave owing money. They’re rare, but they do exist. You can reduce the risk by using the Tenancy Deposit Scheme and by taking out landlord insurance or rent guarantee insurance.
Like all mortgages, the bigger the deposit, the smaller the loan-to-value (LTV) ratio and the better the deals available. The best buy to let rates will be available if you can find a mortgage deposit of 40% or more.
There used to be significant tax benefits to earning income with buy to let properties.
But since April 2016, the government has introduced two major buy to let tax changes. The first was extra stamp duty charges to almost every BTL property purchase. The second was how mortgage interest tax relief is applied.
Mortgage interest amounts can no longer be deducted from any income you earn from a buy to let.
Mortgage interest tax relief is now applied at a blanket rate of 20% on all mortgage interest payments on a BTL property. This reduces profits in almost all cases.
Find out more about tax changes on the Money Advice Service website.
Anyone buying a BTL property has to pay an extra 3% of stamp duty above the usual rate. This is the same as if you were buying a second home (that you did not rent out).
For example: you buy a property as your main home for £250,000. The first £125,000 is stamp duty-free. Because it is not your first property purchase, you pay 2% stamp duty on the remaining £125,000. That's £2,500.
However, imagine that £250,000 property was a buy to let. You’d have to pay 3% on the first £125,000 (0% + 3%), plus 5% (2% + 3%) on the remaining £125,000. The total stamp duty you would end up paying is £10,000. That's an extra £7,500 compared to the old rules.
The second tax change affects mortgage interest tax relief. Most BTL properties are bought on an interest only basis, with landlords relying on selling the property to repay the loan.
In the past, you could deduct the interest paid on your mortgage from your taxable income, meaning you paid tax on your profits rather than your turnover. But following a change in BTL income tax in April 2017, you can no longer deduct mortgage interest from your rental income in the same way.The changes have been phased in over four years:
For 2020/21, mortgage interest tax relief will be limited to the basic rate of income tax. This is currently 20%. Because higher rate taxpayers were initially entitled to 40% relief, they are the most affected by the restricted relief of 20%.
There are still some costs that can be deducted from rental income before tax.
These costs include letting agent fees, property management charges, advertising for a tenant, credit checks, building and contents insurance, council tax, utility bills, furniture, maintenance and repairs.
After deducting any of these allowable costs, tax is charged at 40%. Then mortgage interest relief is applied at 20% of the cost of mortgage interest.
Stay with us here... under the old system, if you had £12,000 annual rental income and your mortgage cost £6,000 (with allowable costs of £2,000), the amount you could be taxed on would be £4,000. The rate of tax would have been 40%, so you would owe £1,600. Your BTL profit would have been £2,400.
Under the new system, the same £12,000 rental income and £2,000 allowable costs makes the total the taxable income £10,000. Your tax bill will amount to £4,000 (40% of £10,000). Mortgage interest tax relief is deducted at 20% (£1,200) of the remaining £6,000. So you will owe £2,800 in tax. This means your profit is just £1,200 – half the amount as under the old system.
It is, however, worth pointing out that if the buy to let property provides your only income, you may be able to use your personal allowance to pay 0% tax on the first £12,500.
Extra costs can include property damage, roof repairs, new furniture, fences and more. Many of these costs are considered allowable expenses, which means they can be deducted from the amount on which you pay tax.
The biggest hit you can face to BTL rental income is generally periods without a tenant. Losing even one month of rental income can have a big impact on rental yield as a whole.
University towns guarantee a new intake of students every year, and cities with cheap housing are often the best BTL locations with the strongest yields.
First, decide on the type of property you can afford. The type of property you choose will influence the type of tenant you attract. For instance, a one bedroom or studio flat might be best for a student, single professional or a couple.
Larger properties will appeal to families or big groups. If you'd prefer families, consider what the local schools are like.
Although total debt is a factor, the expected rental income is the main figure mortgage lenders use to assess the affordability of a buy to let mortgage. Most require rental income that totals at least 125% of the mortgage’s monthly repayments. The extra cash provides a buffer for when the property is vacant, or if a tenant does not pay their rent on time.
Rates are usually higher for buy to let than for residential mortgages. That said, all mortgage rates are still historically low at the moment (2020).
Remember though, that interest rates could rise. That’s why it’s important to use a buy to let calculator to ensure you could make repayments on your investment with higher rates.
Once you have a quote, you can use a buy to let calculator to check your sums before choosing the best buy to let mortgage. To find the best mortgage deal, check a buy to let mortgage comparison table.
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Last updated: 7 January, 2022