Buying a residential property as an investment has become increasingly popular over recent years. Known as Buy To Let (BTL) investments, this strategy involves purchasing a house or flat with the intention of letting it out to tenants to generate rental income. It differs from traditional homeownership because BTL properties are not occupied by their owners; therefore, they fall under different tax regimes, lending criteria, and investment strategies. With interest rates remaining historically low, now is an opportune moment for aspiring investors to delve into the world of BTL mortgages. In this comprehensive guide, we will explore the ins and outs of buying a BTL property and financing it via a mortgage.
What Is a Buy to Let Mortgage?
A BTL mortgage is a type of loan specifically designed for those who want to purchase a property to rent out rather than live in themselves. Unlike standard residential mortgages, BTL loans come with specific features and requirements that cater to landlords’ unique needs. For instance, BTL borrowers often need higher deposit sizes and charge higher interest rates since the risks associated with these types of deals are greater. Nevertheless, given the current economic climate, there is a wide range of attractive deals available for savvy buyers looking to get ahead in the housing market.
The Differences Between Residential & Buy to Let Mortgages
Residential mortgages differ significantly from BTL mortgages regarding eligibility criteria, fees, repayment methods, and tax implications. Here is a brief rundown of each point:
Eligibility Criteria
To qualify for a BTL mortgage, applicants typically must own one or more properties outright or have sufficient equity in existing properties. Lenders also scrutinise credit history, employment status, and affordability checks more rigorously than conventional applications since the borrower’s monthly income does not derive directly from the property itself.
Fees
Most BTL mortgages carry additional arrangement fees ranging from £500 – £2,500, whereas many mainstream mortgages only require a small administrative fee. Some lenders demand professional valuations or surveys too, adding further expense onto the transaction cost. However, these upfront charges should still be less than the expenses involved in selling or relocating a primary residence.
Repayment Methods
There are two main ways to service a BTL mortgage: Interest Only (IO), whereby monthly payments cover solely the accruing interest charged by the bank, or Repayment Mortgages, wherein interest and capital payments are combined each month until the end of the term. IO schemes tend to suit high net worth individuals with alternative streams of revenue, such as pensions or savings accounts. Still, first-time landlords seeking long-term stability generally prefer Repayment arrangements.
Tax Implications
Landlords must declare any rental income earned on a self-assessment tax return. Additionally, they are liable to pay Capital Gains Tax (CGT) once they dispose of the asset, along with stamp duty surcharges and wear and tear allowance changes introduced in April 2016. These charges vary depending on individual circumstances but can substantially impact profit margins.
How Do I Apply for a BTL Mortgage?
Applying for a BTL mortgage follows broadly similar steps to securing a residential deal. Below is a concise breakdown of the application procedure:
Step 1: Research Different Deals
Before embarking on your search for the perfect BTL mortgage, conduct thorough research online and speak with independent mortgage advisors to compare rates and terms across several lenders. Use comparison websites, checklists, and questionnaires to assess your preferences based on factors like the initial rate offered, the length of the mortgage term, early redemption penalties, flexible payment plans, etc.
Step 2: Find a Suitable Property
Once you have identified a suitable mortgage product, seek advice from estate agents or property managers to narrow down a list of prospective houses/flats within your price range. Look out for desirable areas with good transport links, amenities, and rental yields. Don’t forget to factor in maintenance costs and void periods.
Step 3: Make an Offer
When you’ve found a place you love, submit a formal bid to the vendor using a solicitor’s services. Alongside the purchase agreement, enclose proof of funds, ID, and other documentation required by the lender. At this juncture, it may be wise to engage a surveyor to inspect the premises thoroughly and identify any issues that may affect its value or habitability.
Step 4: Complete the Application Form
Fill out the mortgage application form provided by your chosen provider, detailing your personal information, financial background, employment details, and estimated rental income. Submit supporting documents like payslips, P60 statements, bank statements, and references alongside the paperwork already forwarded to the seller’s conveyancer.
Step 5: Wait for Approval
After sending off all necessary materials, wait patiently while the lender reviews your request and decides whether to grant approval. If successful, sign the contract, transfer money to the lawyer handling the sale, and move towards becoming a seasoned landlord!
In Conclusion
Purchasing a BTL property requires careful consideration due to the numerous variables involved. The key takeaways from our article include understanding the contrast between BTL and residential mortgages, familiarising yourself with eligibility criteria, fees, repayment options, and tax considerations, and following a structured process when applying for finance. By doing so, you position yourself well to seize profitable opportunities and thrive as a buy-to-let investor over time. Good luck!