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The following topics are covered below:
What is buy to let mortgage?
Buy-to-let (BTL) mortgages are the most common type of financing used when purchasing a house only for the intention of renting it out rather than living in it. Whether you want to rent the home for a lengthy or short period (like a holiday let), this is true. Many lenders often provide BTL mortgages on an interest-only basis (although some offer capital and interest options). The good news is that your monthly mortgage payments will be reduced because they consist of interest. However, you’ll need a strategy for repaying the capital component after the period. In the case of BTL mortgages, most landlords will pay off the capital component by either allowing the surplus profit from the rental revenue to accumulate or selling the property for a profit before the loan expires.
Borrowing money to buy a buy-to-let home is deemed a greater risk by lenders, which is why typical residential mortgages are not available. However, if you’re searching for a BTL mortgage, there are a few general considerations you should bear in mind before proceeding:
- BTL mortgage interest rates are often higher than residential mortgage interest rates. The arranging costs are also often greater.
- Minimum deposits for a BTL mortgage are typically between 20% and 25%.
- If you own a home currently, you must pay an extra 3% stamp duty surcharge on each subsequent buy-to-let (or second home) transaction.
- Affordability assessments are generally focused on the rental revenue the property may provide in addition to your mortgage payments.
- Most lenders would want rental returns of 125 per cent to 145 per cent of your BTL mortgage payments.
- Some lenders will consider your income to help bridge any gaps between the rental return of the property and the mortgage payments. This is referred to as ‘top-slicing.’
- Although some specialized lenders consider this unnecessary for BTL mortgages, many lenders will still verify your credit history before proceeding with your application.
- When you own a rental property, you will need a more extensive insurance coverage called landlords’ insurance.
- BTL mortgages, unlike residential mortgages, are not typically regulated by the Financial Conduct Authority (FCA)
This is where hiring an expert buy-to-let mortgage broker might come in handy. They will give you all of the information you want about buy-to-let mortgages and will walk you through the whole process.
What are the Buy to let rates available?
Finding the greatest buy-to-let remortgage package is a critical step towards increasing your rental income. Your current mortgage product will normally revert to a higher interest rate when your current offer expires. However, you should not restrain yourself to simply one provider’s buy-to-let remortgage rates. Comparison tables can assist you in determining the range of prices offered.
In general, a buy to let mortgage lender will want a deposit of at least 25% (75% LTV) to 40%. (60 per cent LTV). Interest rates for buy-to-let mortgages are often higher than those on conventional mortgages. The lender will inquire about your estimated rental yield while negotiating a mortgage. The rental yield is the annual rent earned as a percentage of the property’s purchase price. For example, a yearly rent of £12,000 on a £240,000 house would yield a 5% yield. To guarantee adequate cash flow to cover expenses, maintenance charges, and difficulties, strive for an 8 per cent rental yield. The annual cash flow generated by a BTL asset as a percentage of its value is used to calculate the rental yield. The net yield is the return after expenditures, whereas the gross yield is before expenses. The net yield offers a more accurate profit picture for a BTL investor or landlord.
What are the Advantages and disadvantages of a buy to let?
Before committing to a Buy to Let mortgage, there are a few things to think about. First, making such a decision in life may be simpler by weighing the Pros and Cons, which we have highlighted for you because we like to make your life easier.
Thousands of investors consider property a feasible way to increase their earnings. Of course, like any typical investment, there are advantages and disadvantages to consider, but here are a few of the advantages of Buy to Let ownership.
- Capital gain: Although the value of your property can go down and up, traditionally, the property has helped investors well in the long run by increasing in value.
- Earn a Revenue: Hopefully, the property will serve you well during your ownership, with the rent giving you extra income. However, make sure you include in any continuing property expenditures and examine the rental yield for the rate of return.
- Demand: The rental market is now quite robust, with considerable demand. People are looking to rent as an option due to the absence of affordable homes and tougher mortgage screening conditions.
Many people in the UK prefer to invest in property due to the potentially high returns from owning a Buy to Let Property. However, like with most things in life, owning a Buy to Let Property has certain drawbacks. Some of them are:
- Stamp duty increases: For many people buying a buy-to-let property, the property in question will be a second property, perhaps more if part of a portfolio. So, in April 2016, the government imposed a 3% levy on any further property purchases.
- Rental voids: While the intention is to have a tenant in the property during its ownership, every landlord is likely to suffer a time of rental void. Make a careful budget for this.
- Non-payment of rent: Having a rental vacancy due to non-occupancy is a budgeting expenditure that many will budget for, but dealing with a troublesome renter is perhaps more challenging. This is increased by any legal fees that may be incurred.
- Drop-in property value: Unfortunately, some property investors believed that the only way to go was up, but the value of any property may also go down and may even go below what you initially paid for it.
- Legislation: Landlords have a legal obligation, and legislation may be a minefield for many people to navigate. On the other hand, ignorance is no excuse, and heavy fines can be levied if you fail to meet your legal obligations.
What is rental income on a buy-to-let mortgage?
Any money you get for the use or possession of the property is referred to as rental income. Rental revenue for all your properties must be reported. Aside from conventional rent payments, additional sums may constitute rental income and must be recorded on your tax return.
Any cash received before the time covered by the advance rent is called advance rent. Regardless of the time covered or the form of accounting used, include advance rent in your rental revenue in the year you get it. For instance, suppose you sign a 10-year contract to rent your property. You will receive $5,000 for the first year’s rent and $5,000 for the last year of the lease. In the first year, you must include $10,000 in your income.
Property or services received as rent rather than money must be included in your rental income as the property’s fair market value or services. For example, suppose your renter is a painter and offers to paint your rental home in exchange for two months’ rent. If you accept the offer, include the amount the renter would have paid for two months’ rent in your rental income. If your rental agreement grants your renter the ability to purchase your rental property, you have a lease with an option to buy. The payments you get under the arrangement are typically referred to as rental income.
How much is Stamp duty on buy to let?
If the property is valued at more than £40,000 In England and Northern Ireland, this is known as the Additional Stamp Duty Rate, and it is a minimum 3% surcharge on top of your regular stamp duty payment. When you acquire a property that will result in you owning more than one, you will be charged a premium. The most prevalent example is someone who owns their own house and wants to invest in a buy-to-let property. Buy-to-let, second property owners, and limited firms will pay a 3% extra on top of residential SDLT rates beginning October 1, 2021.
Suppose you are a non-UK person or a corporation acquiring property in England or Northern Ireland. In that case, an extra 2% stamp duty surcharge will be applied on top of the existing stamp duty rates beginning in April 2021. In addition, if you currently own property (overseas or in the UK), you must pay extra 3% stamp duty on additional properties, such as buy-to-let and vacation rentals. When acquiring residential property, non-UK corporations must pay 2% and 3% levies.
Stamp duty is paid on rising percentages of the property price of £150,000 or more when acquiring non-residential or mixed-use property (or land).
HMRC defines a non-residential property for stamp duty purposes as:
- commercial property, such as stores or offices
- property that is unfit for human habitation
- agricultural property that is either part of a working farm or is utilized for agricultural purposes
- any additional land or property that is not part of the garden or grounds of a house
- Purchase of six or more housing properties in a single transaction
What are the requirements for buy to let?
Buy-to-let mortgages might be difficult to acquire for applicants who do not own a primary residence, but they are not impossible to obtain. Most mortgage lenders have stringent qualifying requirements, but some are more lenient. Some lenders, for example, are willing to work with small businesses, and having a bad credit history does not mean it’s over if you know who to contact. In these cases, having access to the whole market is critical, and the advisers we deal with have it, so submit an inquiry to be linked to the finest buy to let mortgage broker for someone in your situation.
When determining whether an application fits the buy to let mortgage eligibility standards, most UK lenders will consider the following factors. Criteria in general include:
- History of credit
- Borrower Knowledge
Income/affordability: Some lenders insist on a minimum income requirement for a buy to let mortgage — £25,000 is usual – particularly if you’re a first-time landlord.
Deposit: Generally, buy-to-let mortgages need a greater deposit than residential mortgages. The normal maximum loan to value (LTV) ratio for a buy-to-let mortgage is 75 per cent. Yet, if you examine the whole market, you will discover specialized lenders giving 80 per cent and even 85 per cent under the proper circumstances.
Credit history: Borrowers with a low credit history should look for the lender with the most flexibility for someone in their situation. Some UK mortgage lenders are leery of consumers with no credit history, county court judgments against their names, and borrowers with individual voluntary arrangements (IVAs), as well as those with a history of late payments or defaults.
Experience as a Borrower: Your property experience will most likely fall into one of the following categories. Each area might influence your buy to let mortgage evaluation.
- First-time purchaser
- As a first-time landlord
- Landlord (currently possesses at least one buy to let property)
- Landlord with prior experience (owns a portfolio)
What terms are available for buy to let?
When purchasing a house as an investment, you will not finance the acquisition with a standard residential mortgage. You’ll need a professional buy-to-let mortgage instead. There are options available for first-time landlords, ‘accidental’ landlords, and seasoned investors with vast portfolios. The bad news is that the laws governing buy-to-let mortgages may be a maze.
The great majority of buy-to-let mortgages are interest-only loans. This implies that you will only pay the interest for each month of the mortgage term and not the principal. This can be excellent news in the short term since you’ll be able to reduce your monthly outgoings, but you must have a strategy in place to either pay off the entire loan or remortgage at the end of your mortgage term.
In summary, buy-to-let mortgages are like standard mortgages, but with a few major changes.
- The costs are usually substantially higher.
- Buy-to-let mortgage interest rates are often higher, and you return the initial loan in full after the mortgage term. Repayment-based BTL mortgages are also available.
- The Financial Conduct Authority does not sanction most BTL mortgage lending (FCA). However, few exceptions exist, such as renting out the property to a close family member (e.g., spouse, civil partner, child, grandparent, parent, or sibling). It is popular to refer to them as “consumer buy-to-let mortgages,” and they must meet the same strict standards for affordability as a home loan.
Who is buy to let for?
Landlords use buy-to-let mortgages to purchase property to rent out to renters rather than live in. If you fulfil the requirements for a buy-to-let mortgage, landlords may anticipate a consistent revenue stream as well as the possibility for your property’s value to rise.
However, obtaining a buy-to-let mortgage can be more difficult than obtaining a residential mortgage — you’ll typically need at least a 25% deposit and be able to demonstrate that your rental income will be at least 25% more than the monthly mortgage repayments it would cover. Even the finest buy-to-let mortgage rates are usually higher than regular mortgage rates.
Making time to evaluate the finest buy-to-let mortgages is essential for this reason alone – and this is where our buy-to-let comparison tool comes in handy. You can acquire a buy-to-let mortgage if you meet the following criteria:
- You want to buy a house or an apartment.
- you can afford to accept and understand the dangers associated with property investment
- You already own your own house, either outright or with a mortgage.
- In addition, you have a good credit history and aren’t relying too much on credit cards.
- You make more than £25,000 per year – if you earn less, you may have difficulty getting a lender to accept your buy-to-let mortgage.
- You’re under a specific age – there is an upper age limit preference amongst lenders (70 or 75). This is the age you may be when your mortgage is paid off, not when it is paid off for the first time. So, for example, if you take up a 25-year mortgage at 45, it will end when you are 70.
Many of the key banks and building societies provide buy-to-let mortgages in addition to standard mortgages, and there are numerous specialized buy-to-let mortgage lenders as well. If you are unsure if buy-to-let is right for you or need assistance getting a suitable buy-to-let mortgage, consulting with a mortgage expert is typically a smart idea.
Can you get a buy to let on a company name?
Using a limited company to rent a home might help landlords with bigger portfolios pay significantly less tax. While that promise may seem enticing, it is critical to pause and consider if forming a corporation is a suitable decision for you. Yes, there are significant advantages, but there are also some significant negatives. Unfortunately, transferring your property into a limited corporation is not a cheap or simple procedure. Each property must be sold to your new firm, which might be costly:
- For the property transaction, your corporation must pay stamp duty. You must pay Residential rates. From April 2021, this will be 2% on the £125,000 to £250,000 range and 5% on the £250,000 to £950,000 range. This equates to £1,500 for a £200,000 terraced property.
- Companies are also required to pay the Higher Rates on Additional Dwellings. This is a stamp duty surcharge of 3% from £0 to £125,000 and 5% from £125,000 to £250,000. That’s an extra £7,500 in stamp duty on your £200,000 home. That’s a total of £9,000.
- If the market price exceeds your initial purchase price, you must pay 18% or 28% capital gains tax, depending on whether you are a basic or higher rate taxpayer.
- On your existing personal buy-to-let mortgage, you may be required to pay an early repayment charge.
- Finance fees will be incurred due to the firm applying for and receiving a buy-to-let mortgage on the property. You should also be aware that local firms have access to fewer buy-to-let mortgages, making them more expensive with a higher interest rate.
- There will be legal expenses related to transferring the properties, making modifications to the land registration, and so on.
The primary point is that it may not be viable for landlords with only a few homes. With a larger portfolio, though, it can make financial sense. While this will provide you with an excellent starting point, it is critical that you get professional counsel from your financial or tax adviser before making any decisions.
What is the process of getting a buy to let mortgage?
The buy-to-let processes are broken down as follows:
Stage 1: First, talk to a mortgage broker about the property and budget you have in mind for your buy-to-let venture. They will send you a fact discover form to complete, covering your money.
Stage 2: Once you’ve returned the fact discovery, your broker may investigate the market and identify some potential lenders and prices for your specific situation.
Stage 3: Your broker will next go through these alternatives with you, taking another look at the market and assisting you in deciding on a suitable product. Once you’ve decided on a product, your broker can apply to the lender for a Decision/Agreement in Principle (DIP/AIP). Depending on the mortgage lender, you may be required to provide additional supporting papers; your broker can assist you with this.
Stage 4: After you and your broker have agreed on a mortgage in principle or DIP, you and your broker may complete the lender application. Your lender will next instruct a surveyor to value the property. This will validate the valuation, monthly rental income, and general appropriateness and condition of the purchase to let property. This will very certainly cost you money, depending on the lender.
Stage 5: Once the appraisal is complete and the surveyor has provided the lender with a report, the lender can determine how to proceed. If everything checks up, the lender will be able to complete your application. You may be required to produce further paperwork at this time.
Stage 6: Once the lender approves the mortgage application, they will issue the formal mortgage offer, including the loan’s terms and conditions (sometimes known as Head of Terms). If you are satisfied with the conditions, you should contact your attorneys to fulfil the legal formalities.
Stage 7: Once the legal prerequisites have been met, you can set a date for contract exchange. Your solicitor will contact your lender to seek cash if you’re remortgaging.
Stage 8: Contracts have been exchanged, and the deposit has been paid, allowing you to choose a completion date. You are legally accountable for the property at this stage, and there are financial ramifications if you back out of the contract.
Stage 9: You are now the legal owner of the property and can obtain the keys.
What are the Rules and regulations around buy to let?
The buy-to-let sector has been more professionalized in recent years. While more regulation is not always popular, it does ensure that the private rental sector is more accountable. This raises the sector’s standards even higher. There have been some recent regulatory developments that buy-to-let landlords should be aware of. Here are some of the new rules that all landlords should know.
Electrical safety regulations
Landlords must guarantee that all privately rented houses comply with the new electrical safety rules. These new regulations require that a licensed electrician verify all fixed electrical installations and wiring be verified and tested. Sockets, wiring, fuse boxes, and other permanent electrical elements are included.
Right to Rent rules has been updated
Since March 2020, due to the COVID-19 epidemic, Right to Rent checks have been conducted via video call using a scanned photo or copy of the original papers. As things now stand, letting agencies and landlords will be required to conduct in-person checks beginning September 1st. Checks for renters having a Home Office status are an exception. Prospective renters who have filed for a UK visa or the EU Settlement Scheme will be required to prove their immigration status. The government has established a code of practice for conducting Right to Rent checks.
Changing notice periods and issuance of eviction notices
Throughout the epidemic, the government prohibited evictions and introduced six-month notice periods in England. The eviction notice time has been reduced. Since June 1, landlords have been required to provide renters with at least four months’ notice before repossession. As things now stand, notice periods will revert to pre-pandemic levels on October 1. This is subject to how the route out of lockdown progresses and public health recommendations.
Is it affordable?
Buy-to-let mortgages are usually one percentage point more than residential mortgages. This is due to banks viewing tenants as riskier than owner-occupiers. Some buy-to-let mortgages also carry substantial arrangement costs, which can amount to up to 3.5 per cent of the property’s value. Most buy-to-let
mortgages are interest-only. This reduces monthly payments because landlords simply pay interest and do not repay any capital. The capital must be returned when the loan matures, which is normally after 25 years, commonly done by selling the property.
You do not have to pass the same affordability standards that you would for a traditional mortgage. Rather, you must typically demonstrate that your monthly rental payment will cover at least 125 per cent of your interest-only mortgage payment. It’s important to note that many lenders use their standard variable rate (SVR) for this calculation rather than, for example, your initial two- or five-year fixed rate. So, if your mortgage (based on your lender’s SVR) is £500 per month, you must charge at least £625. Lenders estimate that you will need an additional 25% to cover letting agent fees, maintenance, insurance, and yearly safety inspections. Keep these expenses in mind. A buy-to-let mortgage will require a deposit of at least 25% of the property’s worth. This implies that if you were to purchase a property for £100,000, you would need to put down £25,000 of your own money.
Is buy to let profitable?
One of the most interesting qualities of purchasing a rental property is making cash monthly. Rental revenue is not just regular, but it also requires little maintenance. Therefore, the best property is one that can cover its expenditures (mortgage payments, maintenance, management fees, and so on), resulting in a positive cash flow. Another advantage of purchasing an investment property is capital growth, or in this case, property appreciation. Long-term trends indicate that investors who select the right property can experience considerable capital gain over the medium to long term.
Right now, the UK property market offers a plethora of chances for investors. According to Savills, house prices are predicted to rise by 3.5 per cent in 2022 due to economic growth and housing scarcity. Property is a long-term investment, and another incentive to buy in 2022 is that UK rental costs are likely to rise by up to 17% by 2025. For individuals wishing to buy an income property, predictions show that capital growth chances will increase in the future, with home values rising by 13.1 per cent by 2026.
No investment is without danger, but if you look at it in the long run, buy-to-let can work for you. It’s not a get-rich-quick plan, but money is to be gained if you go in with your eyes open. Although certain recent developments have made buy-to-let less appealing to some investors, it is still profitable if done correctly. While rental yields have fallen, it’s vital to remember that, while rental income is crucial, capital growth is also a feature that makes property investing incredibly profitable.
One of the first things you should do is obtain a fair price for your rental property. Your best chance is to schedule a valuation with a lettings professional who can estimate your rental revenue, answer any queries you may have, and advise you on boosting your return