Guide to Buy to Let mortgages
Many first time Buy to Let property buyers are daunted at the thought of arranging finance for their purchase. Even existing landlords with an established property portfolio can sometimes be put off by the ins and outs of the Buy to Let mortgage market, as both market conditions and lender policies inevitably shift over time. Speak to one of our experienced independent buy-to-let mortgage advisers in Swindon head office to book one to see you locally.
Taking out a Buy to Let mortgage needn’t be intimidating, but it can help to have a bit of understanding about how they work and what to expect when you apply for one, particularly if this is your first step into the world of Buy to Let property ownership.
Factors To Consider Before Taking Out A Buy to Let Mortgage
Many of us have at some point or other held a residential mortgage for our home, and it would be easy to assume that Buy to Let mortgages work in much the same way.
At the most basic level, they are very similar. The lender gives you a loan to finance the purchase of the property, against which the lending is secured. Interest is charged on the amount borrowed, and you make a monthly payment to the lender to cover the interest charge. In the event of defaulted payments, the security held against the property would allow the lender to repossess it. So far, so similar.
However, Buy to Let mortgages represent a higher risk to lenders, not least because tenant arrears or periods where the property is vacant may affect the landlord’s ability to meet the mortgage payments. Because of this higher risk factor, Buy to Let mortgages differ from residential mortgages both in terms of the application criteria, and in their pricing.
It’s an unfortunate but inescapable fact that you’ll pay more for a Buy to Let mortgage than you would for a comparable residential mortgage. Arrangement fees are generally higher (sometimes considerably so) as are interest rates. You should also expect to have to put down a larger deposit; usually a minimum of 15 per cent of the property value, while a deposit of 25 per cent or more may be required to qualify for the better Buy to Let mortgage deals.
Buy to Let mortgage applications
Another way in which Buy to Let mortgages differ from their residential counterparts is in the criteria lenders use to assess the mortgage application. While residential mortgage applications usually take account of employment status, income and expenditure figures (as well as the usual credit reference checks), Buy to Let mortgage lenders will more often base their decisions on consideration of the property’s projected rental income.
Some lenders may use a combination of approaches, for example looking at the projected rent but also requiring the applicant to have a verifiable salary or income over a certain amount.
A common approach amongst Buy to Let lenders is to require the rental income to exceed the monthly interest-only mortgage payment by a certain percentage. For example, if the mortgage payment is £650 per month and the lender requires a minimum 25 per cent margin, then you would need to show that the property could bring in a monthly rent of at least £812.50. The lender may ask a local property surveyor to provide confirmation of a reasonable rental income figure for the property and area. As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage payments.
Buy to Let Company Mortgages
After recent tax change were introduced that affect landlords, many new purchases are transacted through a buy-to-let special purpose vehicle (SPV). This is also know as a company buy-to-let. You can call one of our buy-to-let mortgage advisers in Swindon to discuss the advantages of this type of transaction, but some of these are outlined below.
Mortgage interest relief
Limited companies can offset all their mortgage interest, and other finance costs such as mortgage arrangement fees, against profits from their rental income before paying corporation tax. This means that while individual landlords are effectively taxed on turnover, corporate landlords are taxed on profit.
Rental profits, after deducting finance costs such as mortgage interest, are currently subject to corporation tax at 19%. Small companies with profits of £50,000 or less will continue to pay tax at 19% from April 2023.
The main rate of corporation tax is rising to 25% from April 2023 where taxable profits are £250,000 or more. For companies with profits between £50,000 and £250,000 they will have a marginal rate of 26.5% on excess profits over £50,000.
Taking an income
As the company owns the property, the rental profits belong to the company. To access the rental income for personal use, a form of remuneration needs to be paid, which gives rise to a second tax charge. There are various options such as salary, dividends, provision of assets such as company cars or pension contributions. Each comes with tax consequences, and the best route will depend on personal circumstances.
Building a portfolio
If the aim is to invest in several buy to let properties and there is no need to draw much, or any, income from the rent, the company structure could be an attractive option.
A company can be a useful structure for those looking to pass on their property portfolio to family. It is typically more straightforward and cost effective to transfer company shares to family members compared to properties, or proportionate interests in a property.
Refurbishment Buy to Let
Refurbishment buy to let combines short-term finance (usually a bridging loan) with the security of a long-term exit. It helps landlords maximise their rental yields and optimise the capital value on their properties.
With more and more opportunities appearing in the market, where landlords and developers can add value, it is important to have an experienced independent mortgage adviser who can add value and create solutions for funding.
Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.