Buy-to-Let (BTL) mortgages are increasing in popularity: they represent a fantastic investment opportunity, a tax-friendly option for investors, and a lower-risk option for great returns on savings against the current low-interest rate savings accounts. These interest rates means mortgages are also historically low right now. This this is great on paper, but how to Buy-to-Let mortgages work in reality?
Deposit and Interest
Due to their risk for lenders, By-to-Let mortgages will generally have a higher deposit of around 25% (but can be up to 40%) – so make sure you shop around for a good BTL mortgage like you would do with a personal one. On top of this, the majority of BTL mortgages are interest only. This helps to keep the cost of repayments down, but means you won’t own the property outright at the end of the mortgage term as you won’t have paid off any capital. So you’ll need another way to pay that, either remortgage at the end of the term, sell the property or find another way to finance it.
BTL mortgages are going to have larger fees due to their riskier nature for lenders. So some fees can be as high as 3% for the initial loan, including booking, valuation and arrangement fees.
Most importantly, you’ll pay Capital Gains Tax if you sell the property for profit and it exceeds the annual Capital Gains Tax threshold.
Lenders may request additional criteria be met by the buyer. Unfortunately most BTL lending is not regulated by the Financial Conduct Authority, although some exceptions exist for this – like if you were letting a property to a family member. Other criterion lenders may apply includes:
- Buyers not being able to let the property to groups of unrelated individuals
- Buyers subjected to lower loan-to-value restrictions on new-builds
- Additional conditions on the type and length of letting agreement you draw up with your tenants
- Creating a limit on the number of buy-to-let mortgages you can have.
When it comes to how much you can borrow, like a regular mortgage, this will be linked to ‘income’ – in the case of BTL, that’s the rent you expect to receive. Lenders will require that you set this around 30% higher than your mortgage payment. Talk to a lettings agent to find out how much your rent could be. If you can get a rental return that’s significantly higher than your mortgage payments, you can look to re-invest this money into other properties or deposit it in a savings account – this is majorly important, as your property may be vacant between tenants and you’ll need a financial buffer to seal the gap in mortgage payments. Make sure to find out how much of your rental income will be eaten into by agent fees and maintenance.
We recommend getting expert, impartial advice before taking out a Buy-to-Let mortgage. iLet’s team of industry experts and associates can walk you through the mortgage process – call us to help create your property portfolio today!