Learn more about buy-to-let mortgages
Buy-to-let mortgages are for people who are buying a property with the sole intention of renting it out. They're fairly similar to standard mortgages but there are a few key differences that we will explain in this guide.
Below we aim to answer all the burning questions you might have about buy-to-let mortgages. This information is not specific to Nottingham Building Society mortgages, rather an overview of the whole of the market.
If you want to invest in a property and become a landlord by letting it out to someone else, you may need a buy-to-let mortgage. The main difference between the buy-to-let scheme and standard residential mortgages is the criteria upon which the mortgages are assessed. Off the shelf, the mortgages could be the same product but whether the lender will want it to be a buy-to-let or a residential mortgage is determined by the criteria. Buy-to-let mortgage criteria is normally assessed on whether the rent received, including periods when the property may be vacant, will be sufficient to cover the mortgage payments rather than primarily how much you earn. Residential mortgages are usually based on affordability and income.
Potential landlords who want to invest in houses or flats, understand the risks of investing and can afford to take the risk of a buy-to-let property. Lenders will all have very different eligibility criteria. Generally speaking, you will only be accepted for a buy-to-let mortgage easily if you fit the following criteria:
- You already own your own home whether outright or with a mortgage. First-time buyers are considered but options may be limited as lenders will be a lot more selective.
- You earn over £25,000 per year.
- You are aged below 75. There are some lenders who will lend up to age 79 but you will need to assess your own situation with a mortgage adviser.
- Buying to let can provide an income, a pension or a nest egg for the long run. Of course, net income received from your buy-to-let property will depend on a number of factors including the rental value, how long you have owned and rented out the property, tax paid on the property and how high your particular costs have been in terms of maintenance or renovation.
- A buy-to-let property can give you the option to help family members or friends by renting out the property to them.
- The gap between your rental income and monthly mortgage outgoings may narrow in the months and years to come.
- Buy-to-let properties won’t usually yield a second monthly income early on in the investment due to set up fees, insurance premiums and other costs to get your property ready to be rented out.
- An increase in interest rates could make mortgages more expensive. Existing and would-be landlords need to bear this in mind and plan accordingly.
- You need to find the right property at the right price that will attract the right kind of tenant for you.
Seek advice by speaking to a lettings agent and an independent financial adviser and do your homework on the property before you make a large financial decision such as this.
The interest rates on buy-to-let mortgages are usually higher than residential ones and fees can sometimes be more expensive too. You will need to cover the other costs associated with buying property such as a survey, solicitor’s fees and Stamp Duty Land Tax (SDLT). In England, with SDLT you will have to pay an extra 3% on top of each Stamp Duty band when you purchase a residential buy-to-let property. Stamp Duty doesn’t apply in Wales and Scotland but there are other charges that do apply that you can find out more about on the Money Advice Service website.
As well as the cost of the certifications you'll need and the day-to-day running, insurance and maintenance costs of owning a home that you are renting out, you will have to also prepare for times where there is not a tenant living in the property. You will also have to pay your letting agent a fee if you are not renting it out yourself. Plus, when you come to sell the property you will incur the usual legal and marketing fees that you would with a standard residential property. Finally, if you make a profit when you sell your buy-to-let you could be liable to pay Capital Gains Tax which is payable on the sale of second homes and buy-to-let properties. Find out more about Capital Gains Tax on Which.
From the 2017/18 tax year, changes to the way income from buy-to-let properties are taxed began to be phased in. The new system will be fully in place from the beginning of the 2020/2021 tax year. The amount of Income Tax relief landlords can get on residential property finance costs will now be restricted to the basic rate of tax. Read more about changes to landlord tax relief and whether you will be affected at Gov.uk.
Landlords that are affected by these changes cannot offset their mortgage interest payments against the amount of rent that they receive. Since 2017/18 the percentage of mortgage interest payments that landlords can deduct from rental income has decreased by 25% and the portion of those interest payments that qualify for the new tax credit will increase by 25%.
A lender will take several factors into account when working out how much you can borrow. They will look at whether the property is one that they would accept a mortgage on, as well as credit checking yourself as an applicant and then how much rent you will be able to charge. The expected rent should normally be at least a quarter more than your mortgage payments on the property. They will also look at the size of your deposit which will usually have to be 25% and also whether you can pay the mortgage if the property is empty products. Costs include constant maintenance on the property as well as the potential for tenants not paying their rent on time or, at all. Bad tenants can cause a lot of damage which can sometimes not be covered by insurance. Plus, you have to commit to a long term investment to see a good return but remember, a return is not always guaranteed.