Buy-to-let Remortgage

Now that your current mortgage is coming to the end of its 2-year or 5-year fixed term it’s time to take a look at how much money you could save with a Product Transfer with your existing lender or to move to a new lender that can offer a much better rate.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a mortgage targeted specifically at people who buy property for investment rather than as a personal residence. It is a legal obligation for landlords to have one, as a standard residential mortgage is only allowed if you are living in the property. There are some key differences between a buy-to-let mortgage and a residential mortgage, which you need to be aware of when purchasing a rental property.

The main difference is in the way lenders assess the mortgage application. Residential mortgages are usually evaluated based on your income, whereas a buy-to-let mortgage will be assessed according to the perceived profitability of the rental property.

Buy-to-let mortgages are generally seen as a higher risk to a mortgage lender. This is due to the fact you will rely on rental income to make the payments and the property could well be unoccupied for long periods and incur rental voids.

Larger deposits are usually required of around 25%, and they are generally interest-only loans, meaning you will only have to pay monthly interest payments rather than repayments on the mortgage itself. The loan can then be repaid at the end of the term by selling the property or switching to a new deal as some BTL lenders are now offering deals up to the age of 95!

Who are buy-to-let mortgages for?

A buy-to-let property is for anyone looking to invest in a property for rental income. Specifically, you will need to meet the following criteria to be accepted.

You want to invest in property for rental income.
You are aware of the risks and can afford to take them.
You already own a residential property, though a few lenders do cater for non-homeowners.
You have a solid credit score.
You are financially secure and aren’t servicing a large debt.

What are the advantages of a buy-to-let mortgage?

Investment gains: Although the property market fluctuates, properties generally appreciate over time. By investing in a rental property, you have the opportunity for good long term investment returns.
Rental market stability: The rental market is stable, and younger generations are continuing to need to rent until they can get on the property ladder. There is always a demand for rental property.
Tax benefits: Many of the costs associated with letting a property, such as mortgage interest, repair costs and council tax, can be reclaimed when you submit your tax return

Minimising the Risks:

As long as your property is constantly occupied and you have a steady stream of rental income, paying back your mortgage shouldn’t be a problem. There is no guarantee that you will always be able to find tenants, meaning you may have to pay the cost out of your own income or claim on your landlord insurance. To avoid disappointments it’s advisable to speak with local estate agents or get to know the area in which you are looking for a property to rent, to better understand likely vacant periods. Again at Sussex Mortgages, we have the local market knowledge and can help you with this.

BTL Tax changes

Buy-to-let investors have to pay 3% extra stamp duty on the entire cost of the property when purchasing a rental property if they already own another property. Also, from 2020 you can no longer claim the entire cost of your mortgage interest against your profits, only 20% of the cost which may push you into a higher rate tax band of 40% or even 45%.

How does a buy-to-let mortgage work?

Deposit:

In general, a buy-to-let mortgage will require you to put down a larger deposit, usually 25% of the value of the property. This will differ (between 20-40%) according to the lender you go with.

Who Can get a BTL Mortgage:

As with residential mortgage applications you can use a mortgage calculator to assess how much you can borrow, but there is no substitute to talking to an expert who has local knowledge and is aware of other factors you may not be aware of.

You can get a buy-to-let mortgage under the following circumstances:

You want to invest in flats or houses
You can afford to take and understand the risks of investing in property
You already own your own home – regardless of if the mortgage is paid off
You have a good credit record and aren’t stretched too much on your other borrowings, for example, credit cards.
You earn more than £25,000 per annum. If you earn less than this you might struggle to get a lender to approve your buy-to-let mortgage and they may charge higher rates.
You’re under a certain age. Lenders have upper age limits, typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. Though some lenders are now offering mortgages that end right up to age 95.

Application:

When applying for a buy-to-let mortgage, your lender will assess your suitability based on several different factors. While a standard mortgage application is assessed based on your financial circumstances, a buy-to-let application is also significantly based on the expected rental income of your property.

They will usually specify that your rental income must be at least 125% of the mortgage repayments if you are a basic rate taxpayer of 20%. If you are a higher rate tax payer your income must be 145% of the mortgage repayments. So take this into account when deciding how much rent you can charge. Your lender will check the figure you provide against the local rental market to make sure this is a reasonable amount to expect.

They will also look at your financial circumstances, including:

Credit history: This is the most important factor, as it tells the lender how likely you are to be able to keep up with repayments. It takes into account your past credit activity, outstanding debts, and how well you have managed your payments in the past.
Personal income: Depending on your lender, they may specify that you must meet a minimum income threshold to qualify. A few specialist lenders do not require any income but you will pay higher rates. Most mainstream BTL lenders start at around £20,000 to £25,000 a year income.
Outgoings: Your lender will also want to know how much money you spend each month, including bills, mortgage payments, loans, and credit cards.

Based on these factors, if your lender determines you to be a reliable applicant, you may be able to put down a smaller deposit.

It’s important to bear in mind that there will be several additional costs involved with a buy-to-let property, and these will factor into whether or not you can afford your mortgage. These may include:

Stamp duty
Rental income tax
Building and landlords’ insurance
Rent insurance
Letting agent fees
Repairs and maintenance

Repayment:

Most buy-to-let mortgages are interest-only, meaning that you only repay the interest on the mortgage, but not the capital amount. At the end of the mortgage term, you will repay the full amount. The rate of interest rates you pay will depend on several factors, including how much you borrow, your expected rental income, the type of mortgage, and the deposit you put down.

At the end of your term, you may be able to extend the mortgage, or you may consider selling the property as a means to repaying the loan. Usually, given the tendency of house prices to rise, you will still see a significant profit. However, there is a level of risk involved, since if house prices fall, you will need to repay the mortgage loan out of your own pocket.

Speak to a mortgage broker

If you are considering investing in a buy-to-let property, it is best to talk to a professional mortgage broker about your options. Get in touch to find out how we can help you.

Buy-to-lets that are bought specifically for investment purposes and that you have never lived in are not regulated by the Financial Conduct Authority (FCA). If you rent out a home you have previously lived in (Let-to-buy) then these are regulated by the Financial Conduct Authority (FCA).

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