Buy-to-let mortgages are needed for when you want to buy a house and immediately rent it out. The cost of a buy to let mortgage is often greater than a residential mortgage, but is legally required for letting purposes.
By renting a house out on a residential mortgage, you’re probably breaking the contract terms and could be due a hefty fine, or even the full balance due.
Who Can Get A Buy To Let Mortgage?
Whilst you don’t need to be a seasoned property investor, there are a few general eligibility requirements that need to be considered:
- You have a deposit of at least 25%
- The rental amount earned will be greater than the cost of the mortgage payments
- The property value is greater than £40,000
- The property is solely for rental purposes
Aside from that, you usually have to be over 25.
What Could I Borrow?
The amount you can borrow is usually dependent on the rental income you can secure. It usually needs to exceed your mortgage payments, somewhere between 125% and 145% of the mortgage monthly payments. However, your personal salary may be taken into account, too. Normally you need to be earning over £25,000 per year, but this isn’t always the case.
What Are The Costs?
When considering a buy-to-let mortgage, you need to be aware of the costs.
Buy To Let Deposits
As mentioned previously, your deposit will be need to be at least 25% of the property’s value, however the greater the deposit, the better your rate will be offered. Interest rates are often categories alongside a mortgages Loan To Value (LTV). An LTV is expressed as a percentage of the property value that is paid for by the mortgage. So if you have a 25% deposit, it means your LTV is 75%.
An LTV of 65% would most likely afford you a better interest rate than a mortgage against an LTV of 75%.
It goes without saying interest will be applied to your mortgage loan. However you need to consider product fees. In some cases product fees can be added to the cost of the mortgage but it’s likely you’ll be charged interest on these, too.
The other main fees to consider are early repayment charges (ERCs) if you want to make pay off your mortgage early. These can be quite high, so it’s important to consider this in your longer term strategy.
You’ll need to pay stamp duty if your purchase is over £125,000. You can find up to date Stamp Duty information here.
You’ll need to declare your rental income on your tax return. The cost of your mortgage is now non-tax deductible, but can still be claimed on the basic rate.
Capital Gains Tax
Capital gains tax will be applied when you sell your buy to let property.
Maintaining the property
The cost of running and maintaining the property also need to be factored in. Whilst the tenants would often cover the utility bills, it’s up to you to manage the maintenance of the property – repairs, boiler service, plumbing issues are common examples. There’s also insurance and if applicable, ground rent.
Letting Agent fees
You also need to factor in any fees for letting agents or any legal work on putting together tenancy agreements.