What is a buy-to-let mortgage?
A buy-to-let (BTL) mortgage is used by landlords who intend to rent their home. Most of the larger lenders offer BTL mortgages, as do some specialist lenders. The amount of money that you can borrow depends on how much you can expect to receive through rental income, with most lenders requiring this to be 125% of you monthly mortgage repayments (some might require as much as 145%). The type of property you choose will also affect the lender’s decision.
There are a few differences compared to a residential mortgage:
- The product fee and interest rates are normally higher.
- The minimum deposit is generally higher, at around 25% of the property's value (there are a handful of lenders who will consider a lower deposit).
- Most borrowers opt for an interest-only BTL mortgage deal, which allows them to keep the mortgage payment low and earn more from the monthly rental income.
- A significant percentage of the mortgage lending isn't regulated by the Financial Conduct Authority (FCA).
To secure a BTL mortgage, you’ll need to satisfy the following criteria:
- You must be over 18.
- You must be earning more than £25,000 per annum. A few lenders will ask for less than this and some don’t have a minimum requirement at all.
- You’ll need to pass a credit check.
- You’ll need to pass a stress test to prove you can afford the monthly repayments (as well as the interest) and to assess the risk involved. The test applies to the total amount you’re borrowing against the purchase price of the property - known as the loan-to-value (LTV) ratio. Lenders tend to offer a maximum LTV ratio of up to 85%, meaning a deposit of 15% would be required.
What interest rates are available on buy-to-let mortgages?
A wide range of lenders offer buy-to-let mortgage products, so it can pay to shop around. A mortgage adviser will have access to a range of lenders and can help find the most suitable deal for you.
It's common for the interest rates on buy-to-let mortgages to be higher than residential mortgage rates. They can be influenced by a range of criteria, including:
- the size of the deposit that’s put down
- how healthy your credit score is at the time
- the product - how many years fixed rate or variable rate etc
In most cases, the interest rate will vary between two and three percent (as of October 2018). The banks set the standard rates, which may be influenced by the Bank of England’s bank rate.
A variable rate mortgage, such as a tracker mortgage, mirrors the Bank of England’s bank rate, plus a set margin above or below it. This means that your monthly payments can go up or down if the Bank of England’s rate rises or falls. Landlords considering this type of buy-to-let mortgage deal should therefore be prepared for a rise in mortgage payments.
If the Bank of England keeps their rate low during the term of your deal, you may benefit from lower payments than with a fixed rate mortgage (where your monthly payments will remain the same for the term of the deal). But, if the Bank of England’s bank rate rises during the term of your tracker mortgage, your payments may be higher than they would have been with a fixed deal.
What tax relief or allowable expenses are available on a buy-to-let mortgage?
The new buy-to-let tax system introduced in April 2017 means that landlords of residential properties will be restricted to the basic rate of Income Tax. The changes will be fully in place from 6th April 2020. At this point, you won’t be able to deduct any of your mortgage interest payment from your rental income before paying tax – instead, the entire sum of your interest payment will qualify for a 20% tax relief.
Based on the Income Basic Tax rate of £11,001 to £43,000, the higher rate of £43,001 to £150,000, and a personal allowance up to £11,000, it’s estimated that after the restriction, 82% of landlords won’t have any additional tax to pay because their total income, without a deduction for finance costs, doesn’t exceed the higher rate threshold. However, if you’re a landlord with a higher total income than the higher rate threshold, you’ll pay more tax.
Allowable expenses to secure tax relief:
- must have been incurred by you wholly and exclusively for the purpose of the letting business, such as paying a plumber to repair a faulty boiler.
- must not be capital expenditure (where spending creates an asset of enduring benefit or when you add something to the property that wasn’t there before). This includes improving or upgrading something that was existing and that increases the property’s value. Instead, these costs should be deducted from capital gains when the property is sold. However, if the kitchen being fitted is like-for-like, of the same standard, size and layout, the cost can be set against your rental income.
Even when an expense is not capital expenditure, to qualify as an allowable expense, it will need to fit into one of two categories:
- Repairs and maintenance - applied either to items within the property or to the property itself, on a like-for-like basis. You can’t claim for repairs that have been covered by insurance, but you can claim for excess amounts or the parts of the repair work that you’ve had to pay for yourself.
- Replacement of domestic items - the initial purchases of furnishings and equipment for the property are not allowed, but their replacement (of a similar standard or value) is. This includes movable furniture, furnishings, household appliances, and kitchenware.
Mortgage advisers aren’t qualified to offer tax advice, so it’s recommended that you seek independent tax and legal advice.
How much can I borrow with a buy-to-let mortgage?
Subject to passing the stress test to prove that you can afford the monthly repayments (as well as the interest) and to assess the risk involved, you can borrow up to 85% of the purchase amount.
The test applies to the total amount you’re borrowing against the purchase price of the property - known as the loan-to-value (LTV) ratio. Like any other mortgage, the borrower must put up a deposit for the property. Lenders tend to offer a maximum LTV ratio of up to 85%, meaning a deposit of 15% would be required.
Some lenders are more generous than others and the amount you can borrow on a buy-to-let mortgage is mainly based on the monthly rental you’re getting or are likely to get. However, there are a number of banks and specialist buy-to-let lenders who offer an approach known as ‘top-slicing’, where they’ll allow landlords applying for a buy-to-let mortgage to use both the property’s rental income and their own earned income from employment or self-employment, to enable them to borrow more.
Can I change a residential mortgage to a buy-to-let?
Switching from a residential mortgage to a buy-to-let mortgage is very common - you might be moving home or already have an empty house under a residential mortgage. If you have a residential mortgage but want to switch to a buy-to-let, you’ll need to take the following actions:
- Inform your lender. You could be in breach of your loan agreement if you don’t inform your lender, so get in touch and ask them for a ‘consent to let’ form. They may increase your interest rate (typically by around 1%) and will expect you to remortgage to a buy-to-let mortgage at the end of your current deal.
- Inform your insurer. You'll need to secure landlord's insurance because standard domestic contents insurance won't cover your property if you're renting it out.
- Speak to a letting agent. They’ll be able to help you with the tasks involved in renting out your property and will deal with all the legal and administrative aspects, as well as managing any maintenance that might need to be carried out.
- Talk to a tax advisor or accountant. You'll need to be aware of the tax implications that affect buy-to-let homes, such as stamp duty which, in 2016 was increased on buy-to-let properties and is around 3% higher than on residential mortgages.
How many buy-to-let mortgages can I have?
This varies from lender to lender and largely depends on their appetite for risk. For example, some lenders won’t lend to you if you’re a portfolio landlord. Some may also view landlords with multiple properties in the same location as risky, because a downturn in that specific area would affect the rental attractiveness of the properties and ultimately increase the likelihood of their loan not being repaid.
Many of the mainstream buy-to-let lenders will stipulate a maximum number of buy-to-lets and set a limit of around three to five mortgaged properties (or maximum borrowing amount with them). Some lenders may even set limits on the number of buy-to-let mortgages you can have with other lenders.
Any lender will be looking to ensure you can afford the new mortgage on top of your existing mortgage/s. They’ll calculate if any buy-to-let properties in the background are self-sufficient or not (this usually means rental covering the mortgage by anywhere from 100% to 150%, depending on the lender), and whether any second residential mortgages and their running costs are adequately covered by employment income.
Talk to an experienced buy-to-let broker such as Trussle, who can advise you on how best to proceed and whether your existing lender may or may not be the most suitable option for you.