Buy-to-let (BTL) properties are a popular investment. And with the rise of the 'staycation' and Airbnb trend, the popularity of BTLs doesn't look to be slowing.
If you're looking to buy-to-let, then this article is for you. Members of our Conveyancing, Tax and Dispute teams have outlined everything you need to know about buy-to-let mortgages.
This article is quite long and comprehensive. To make it easier to navigate, we’ve provided some quick links below…
- What is a buy-to-let mortgage?
- Who is eligible for a buy-to-let mortgage?
- The pros and cons of buy-to-let
- The conveyancing process for buy-to-lets
- The tax implications of rental property
- Stamp Duty implications of buy-to-lets
- The responsibilities of a landlord
Buy-to-let (BTL) mortgages are specific mortgages for borrowers in order that they may purchase a property to rent out to another person rather than live in it themselves. Thereby becoming a landlord of a property.
How do buy-to-let mortgages work?
Most BTL mortgages are interest only, meaning that borrowers only pay the interest on the loan and none of the capital. The interest is paid monthly.
The full amount of the mortgage (the capital debt) will still be payable at the end of the agreed mortgage period.
For most borrowers, the monthly interest payment amount shouldn’t in itself be too much of an expense and is usually covered by the rent received on the property.
However, borrowers will need to make sure that they are able to pay off the capital debt at the end of the term; or refinance the loan.
This often depends on the mortgage lender. Some lenders will not lend to a person if they do not already own a home or have a bad credit history, but some will.
There are some criteria though, that most lenders will take into account…
What deposit do I need for a buy-to-let mortgage?
One of which is the deposit. Generally, buy-to-let mortgages require a higher deposit than residential mortgages. According to onlinemortgageadvisor.co.uk, the average loan to value (LTV) ratio for a BTL mortgage is 75%; meaning that borrowers will require a 25% deposit.
This does of course vary between mortgage providers.
Can I get a buy-to-let mortgage with bad credit history?
It is possible to get a BTL mortgage with bad credit history. You will have to find a mortgage provider who is willing to lend to you.
For providers, lending to a person with bad credit history is a risk; so they will likely ask for a larger deposit to protect themselves.
What salary do you need to get a buy-to-let property?
Some lenders outline a minimum yearly income before they will lend to you. The standard minimum is £25,000. Providers are more likely to impose a minimum income if you are a first-time landlord.
Other lenders will have lower minimum income criteria, with some even having no income requirements.
Most of the time, as long as there is no risk of non-payment; lenders will be happy.
Will rental income cover the cost of the mortgage?
Rental income should cover the cost of the mortgage, and the salary of the borrow should largely not be relevant.
Can I buy-to-let as a first-time buyer?
Yes, if you meet the mortgage lender’s criteria!
However, it is important to be aware there are certain implications involved:
- You will require a larger deposit requirement
- There will be a smaller selection of mortgages available
- You will not be eligible for first-time buyer relief on stamp duty (you will be charged a ‘home mover rate’ which is the same rate that a non-first-time buyer would pay).
You’ll earn rental income.
You have to complete annual tax returns
If the property value increases you will generate capital growth.
If the property value decreases, your capital will reduce.
If you set up a limited company, all expenses are tax deductible
If you set up a limited company, there are costs involved including legal fees
If you sell a BTL property for more than you bought it for, you make a capital gain.
For interest-only mortgages, if you sell the property for less than you bought it for, you’ll need to make up for the shortfall.
Not necessarily. This is dependent on several factors; such as the requirements of your lender (which may differ from those of a standard purchase, as there are certain conditions to be met) and type of buy-to-let property you are purchasing.
Every conveyancing transaction is unique, and we recommend using a solicitor with a good knowledge of the buy-to-let process who will be able to guide you through it.
At Frettens, our bright Conveyancing Team would be happy to discuss your circumstance with you over the phone or in person.
We offer a free initial chat for all new clients.
Owning a rental property might be the first time that you receive income that is not taxed at source, and therefore might well involve you completing self-assessment tax returns every year.
You will therefore need to register for self-assessment with HMRC, more information can be found here.
Records of both income and expenditure will need to be kept, to enable the tax returns to be submitted each year, and the correct amount of tax then paid.
Some expenses will be deductible against income tax and some against capital gains tax.
Capital Gains Tax
Income tax arises on the net rents each year, at 20% for basic rate taxpayers and 40% for higher rate taxpayers.
Capital gains tax would only be relevant if the BTL is ever sold for a profit. Main residence relief will not exempt the gain from tax as this is a property you will not have lived in.
The annual exemption will reduce the taxable gain, but the profit on sale will be taxed at 18% and or 28%, again depending on your basic/higher rate status for the tax year of that disposal.
Tax advantages of purchasing a buy-to-let under company name
It is also worth taking advice (ideally before you buy!) on whether it is best to hold your BTL in your own name, or in a company name which you own.
There are tax and other advantages to using a company structure, but this will add a level of paperwork and annual compliance that can outweigh the advantages.
Generally, a company structure works better when the intention is to hold a number of BTL, and less beneficial if you are just owning one or two, or for example are an “accidental landlord” through inheritance.
If you already own a property and purchase a buy-to-let property, you have to pay an extra 3% above the standard rates of SDLT as it is an additional property and not your place of residence.
If you do not own a property and purchase a buy-to-let property, then the higher rate of SDLT would not apply.
Bright Conveyancing Solicitors
We offer all new clients a free initial chat with one of our bright, friendly lawyers over the phone or by video call.