Buy-to-let mortgages

"In recent months, buy-to-let fixed rate pricing has seen a marked reduction, and lenders are becoming more flexible with their criteria, especially regarding minimum income requirements and “top-slicing” for buy-to-let mortgages.

"However, it's important to note that while the lower rates are enticing, higher arrangement fees have also emerged. When selecting a mortgage product, it's wise to consider this balance. Sometimes, choosing a mortgage with a slightly higher rate but a lower arrangement fee may prove more cost-effective."

Securing a buy-to-let (BTL) mortgage involves meeting more stringent criteria than a residential mortgage. While these requirements vary among lenders, they typically include:

• Minimum Age: Usually between 21 and 25 years old.

• Maximum Age: More flexible in the BTL market, though some lenders have an upper age limit either at application or by the loan repayment date.

• Home Ownership Status: Fewer lenders offer BTL mortgages to first-time buyers, but options are available.

• Minimum Income: While not all lenders require it, some deals may necessitate an annual income of £25,000 or more.

• Deposit: Typically, lenders ask for at least 25% of the property's purchase price, with portfolio landlords often needing larger deposits, around 40%.

• Rental Income: Borrowing is based on rental yield, with most lenders requiring the property to generate at least 125% of the mortgage repayment cost. For portfolio landlords, this can rise to 145%. Many lenders also prefer an ARLA registered letting agent to verify rental potential.

• Property Type: Not all lenders accept applications for HMO (house of multiple occupancy) properties or mixed-use rentals, necessitating a more specialised lender for anything other than single-let properties.

• Credit History: As with other types of mortgages, a better credit score provides access to a wider range of providers and more favourable interest rates.

• Tax: Landlords are subject to different taxation rules compared to private residential property owners. When purchasing a property, you will incur additional Stamp Duty. Furthermore, you will be liable for Income Tax on the rental income earned from your tenants. It's also important to note that if you decide to sell your buy-to-let property in the future, you may be subject to Capital Gains Tax.

Depending on the type of landlord you are, there are several buy-to-let mortgage categories available:

• Standard Buy-to-Let: Often called a "vanilla" buy-to-let, this is ideal for existing landlords or those looking to secure a single mortgage to rent out family homes on a secure tenancy basis. This can be done either as an individual or through a limited company buy-to-let, where a special purpose vehicle (SPV) is used. An SPV is a company created solely to handle the purchase, sale, and letting of property for profit.

• Limited Company Buy-to-Let: A limited company buy-to-let involves purchasing and managing rental properties through a limited company, rather than in an individual’s name. This structure means the company owns the property. For higher rate taxpayers and contractors, this approach can offer significant tax advantages, making it an attractive option. (Note: Some types of buy-to-let mortgages are not regulated by the Financial Conduct Authority).

• Family or Regulated Buy-to-Let: This mortgage is like a consumer buy-to-let but is specifically intended for letting property to close family members. Often known as a family buy-to-let, this type is not meant for profit. It's typically used when a spare or inherited property, not occupied by the owner, is rented out at market rates to a close relative.

• Consumer Buy-to-Let: This mortgage targets individuals who have become landlords by circumstance rather than by choice. Regulated by the Financial Conduct Authority (FCA), these mortgages are not strictly for commercial gain. A typical example is when an existing home is let to enable a move to a new home.

• HMO Mortgage: For landlords dealing with houses of multiple occupancy (HMO), not all lenders offer buy-to-let mortgages for such properties. Sometimes referred to separately, an HMO mortgage is essentially a standard buy-to-let mortgage but with additional regulations to comply with.

Buy to Let Costs:

• Mortgage Fees: Expect to pay arrangement fees, valuation costs, and legal fees, which are typically higher for commercial properties.

• Deposit: Usually, you’ll need to put down 25-40% of the property’s value. There are a few lenders who may accept 20% if the rental income can support a higher loan.

• Monthly Repayment: Your monthly costs will depend on the property’s value, the amount borrowed, and the interest rate. Buy-to-let mortgage rates can vary based on whether you choose a fixed or variable rate and the lender’s assessment of your borrowing risk (often based on the Loan-to-Value ratio and property type).

• Final Capital Repayment: Most buy-to-let mortgages are interest-only, meaning you’ll need a plan to repay the capital (the amount borrowed) at the term’s end. Options include saving a portion of rental income, selling the property, or remortgaging. Some borrowers decide to take a repayment mortgage, where you pay back the debt on a monthly basis, alongside the interest.

• Additional Stamp Duty: If you own other properties, you’ll face a second home surcharge on any additional property purchase. In England and Northern Ireland, this is an extra 3% on top of standard stamp duty, 6% on top of LBTT in Scotland, and 4% on top of LTT in Wales. First-time buyers of buy-to-let properties won’t qualify for standard stamp duty relief. Stamp duty rates can change, so it is important to review the rate that applies when planning to buy.

Other Costs to Consider:

• Letting Agent Fees: Letting agents typically charge 10-20% of rental income to manage the property. There may be some room to negotiate the rate.

• Maintenance Costs: Ensure your property meets legal requirements, such as gas safety certification, and maintain it in good condition.

• Income Tax: Rental income is taxable at your applicable income tax rate. If you buy through a limited company, you’ll pay corporation tax on profits, which is generally lower.

• Capital Gains Tax: Payable on any profit when selling a rental property. Consulting a tax specialist is advisable.

• Building and Landlords’ Insurance: You’ll need buildings insurance for structural issues and may want landlords’ insurance to cover periods without tenants or non-payment issues.