Mastering The Buy To Let Mortgage
Thanks to the upsurge in property values combined with the high demand for housing in the UK, the buy-to-let market has experienced surging growth of late. Even with recent shifts in tax policy and legislation – which we’ve reviewed elsewhere – this market keeps getting bigger with every passing year. Investors who want a strong return on their money should take a careful look at the buy-to-let market!
It should come as no surprise that interest in buy-to-let mortgages has risen alongside this surge in investment. Investors at every financial level are keen to stake their claim on a promising piece of property for letting. If you’re one of the people interested in buying this sort of property, here’s what you need to know about mortgages designed to help you.
1. Deposits On Buy-To-Let Mortgages Are Higher Than Residential Deposits
You mustn’t expect to encounter the same terms with a buy-to-let mortgage that you would find in the residential market. A buy-to-let mortgage is, after all, a commercial instrument. Arrangement fees are typically higher than those for residential mortgages. More importantly, you’ll need to put down a larger deposit for a buy-to-let mortgage.
In most buy-to-let mortgages, the loan-to-value ratio is around 75 percent. This means you’d need a deposit equal to 25 percent of your prospective property’s value. You’ll find a wide range of different buy-to-let mortgages available in today’s market, many with favourable payment terms. You must bear in mind that these mortgages require even greater deposits, usually in the range of 30 to 40 percent.
2. Repayment And Rent
Your lender will take a keen interest in the letting potential of your property when negotiating your mortgage. This includes consulting with you regarding how much rent you intend to charge. The lender will typically want to see a monthly rental payment equal to 125 percent of your loan payment or more. Such an arrangement builds in an automatic 25 percent profit margin on your property. This is not intended to provide you with extra income; your lender wants to help you build a buffer so that you can continue making payment in the event of any dry spells when there is no rent coming in.
3. Residential Mortgages Are Not An Option
A residential mortgage is expressly designed for the use of homeowners. Using one on a property you intend to let is fraud. The best-case scenario here is a serious negative impact on your financial status; prosecution or even imprisonment are even possible. This is why you have to master the principles of the buy-to-let mortgage before buying a property to let.
4. Tax Implications
Properties you purchase and let out are considered investments. This means that the income you derive from them is taxable; you’ll need to declare all rental income during your annual self-assessment. The rate at which you’re taxed depends on your total level of income, and rates between 20 and 45 percent are currently typical. There is a spot of bright news, though: letting property is a commercial endeavour. This means that you can legitimately offset some of your new income to handle allowable expenses.
Not all investment properties are considered equal! The time to think about exactly what sorts of tenants you’ll be seeking is during the mortgage application process. Reviewing your intentions with your lender is an excellent idea. He or she can help you match your mortgage with your intended letting strategy. As an example, a large property that will be let to students – where three or more people share living space – qualifies as a House of Multiple Occupation (HMO). HMOs require appropriate mortgages.
In the UK, the market for buy-to-let properties is still expanding rapidly. Just remember to educate yourself thoroughly before diving into that market. Before you go looking for a buy-to-let mortgage, make sure you understand what regulations and subtleties apply to this specialised form of lending. Your property investment portfolio will grow stronger and faster if you build it upon a solid foundation of financial knowledge.
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