If you’re already a landlord or are looking to buy a property to rent out, you should be considering a buy-to-let mortgage. A wide range of fixed-rate, standard variable rate (SVR), tracker and discounted buy-to-let mortgages are available and, although they’re similar to ordinary residential mortgages with the same laws, there are some differences that you need to be aware of.
Costs are higher
Fees for buy-to-let mortgages can be higher than traditional mortgages and interest rates will also be higher on a buy-to-let mortgage.
You’ll need a bigger deposit
Because buy-to-let mortgages are considered a higher risk than residential mortgages, the minimum deposit you’ll need for a buy-to-let mortgage can be higher. You’ll usually need a minimum deposit of 25% of the property’s value, although this can vary between 20% and 40% depending on your mortgage lender and buy-to-let mortgage product.
Repayments for the majority of buy-to-let mortgages are interest-only, which means you won’t be reducing the capital sum that you borrowed. At the end of the buy-to-let mortgage term, you’ll repay what you originally borrowed in full. Talk to your mortgage adviser if you’re specifically looking for a repayment buy-to-let mortgage.
The majority of buy-to-let mortgage funding isn’t regulated by the Financial Conduct Authority (FCA). Your mortgage adviser can give you guidance on consumer buy-to-let mortgages if you want to let your property to a family member.
Your lender will usually require the rental income on your property to be up to 30% higher than your buy-to-let mortgage repayment so do your homework by researching rental values in your area. Remember that you’ll still need to make your mortgage repayments when your property is unoccupied and that, if house prices fall, you may fall into the negative equity trap and will have to make up the shortfall if you decide to sell.
You’ll also be required to pay Capital Gains Tax (CGT) on your buy-to-let property when you sell and Income Tax on any profit that you make on your rental income. Depending on your income tax band, you could be taxed at 20%, 40% or 45%. Talk to your accountant about CGT, Income Tax and Mortgage Interest Tax Relief, which is changing.
As you can see, there’s more to buy-to-let mortgages than you might think. It’s always best to talk to an experienced, independent mortgage adviser to find out if you’re eligible for a buy-to-let mortgage and to see which buy-to-let product is most suitable for you. Call our expert team on 08454 500200 or click here to find out more.