What is a buy-to-let mortgage?
Buy-to-let mortgages are required when the property you have purchased is going to be let out for rental income.
Unlike normal residential mortgages, buy-to-let mortgages are more commonly based on the rental income of the property rather than the income of the borrowers. You can also expect the deposit required for a buy-to-let mortgage to be higher than that of a residential mortgage, normally in the region of 25%. Some lenders might go as low as 15-20-% but such deals are hard to obtain and can be very restrictive in their terms.
Lenders require landlords to be able to achieve a higher rent in relation to their mortgage repayments, normally ranging from 125-145% depending on your personal tax liability of the mortgage payment, at a stress rate of 5-6%.
You can also ‘top-slice’, whereby you top-up the mortgage amount using personal income. See below for more details.
What is a top-slicing buy-to-let mortgage?
If the rental income is not enough to cover the mortgage payment based on the deposit, some mortgage lenders will also take into account personal income towards affordability of the buy-to-let mortgage. This is called ‘top-slicing’ and requires a full affordability assessment to check what surplus income can be used to help towards the buy-to-let mortgage payment after all current expenditure and other mortgage payments have been taken into consideration.
Limited Company Buy-to-Let Mortgages
These apply when you purchase a property as a limited company rather than in your own name. You must be a registered Director of the limited company and will be subject to similar checks and underwriting as if you were buying the property in your name.
Why would I buy a property in a limited company?
- These arrangements are often set up for individuals looking to purchase more than one property, grow a portfolio, or simply for higher rate taxpayers purchasing a BTL. There are significant tax advantages when purchasing a property through your limited company
When purchasing through a limited company what things do I need to consider?
- Most lenders require a Special Purpose Vehicle (SPV) Ltd company. The registration codes for these normally fall under one of the following categories:
- 68100: Buying and selling of owned real estate
- 68201: Renting and operating of Housing Association real estate
- 68209: Other letting and operating of owned or leased real estate
- 68320: Management of real estate on a fee or contract basis
- Other limited company BTLs mortgages can be arranged. For example, trading businesses (not an SPV), and BTLs with and without personal guarantees. Rest assured, a Home Group Advisor will be able to answer any queries you may have.
- Obtaining expert tax advice is a key part of the process before you purchase property as a limited company. Your longer term plans and personal tax liabilities will determine whether this is the most appropriate route for you.
- New companies can be set up solely for the purpose of buying property in the company name.
Portfolio Landlord Mortgages
A portfolio landlord is normally defined as an individual that owns four properties or more in their personal name or via limited companies. These landlords are generally treated slightly differently to other buy-to-let landlords.
Over the past few years there have been a number of changes for buy-to-let landlords.
- Increases in stamp duty, reduced tax relief and the tightening of buy-to-let mortgage criteria have all resulted in higher tax bills for landlords.
- The Prudential Regulation Authority (PRA) have brought in more rigorous affordability rules to deter inexperienced landlords from higher-risk BTL purchases and encourage experienced landlords to effectively run their portfolios more like a ‘business’
Following the changes, lenders will conduct affordability assessments across the landlord’s entire portfolio, to ensure each BTL property is self-sufficient and the entire portfolio is sustainable.
Mortgage products that lend on a portfolio basis – rather than on an individual buy-to-let mortgage for each property – are also available. This isn’t always the most cost-effective option but there are some advantages to this, such as:
- Security is secured against the total value of the portfolio, giving greater leverage to increase capital for withdrawal or the purchase of more buy-to-let properties
- With this flexibility landlords are able to diversify their portfolio towards properties that give a better Return on Investment (ROI). For example, auction properties, renovations, flats under one freehold and student lets.
Take a look also at our Buy to Let Mortgage Repayment Calculator.
What is a ‘let-to-buy’ mortgage?
A ‘let-to-buy’ mortgage is where you are living in your current home and you want to use the equity without selling that property to move elsewhere. Most lenders will require a decent amount of equity before accepting applications or will have a limit on the Loan to Value (LTV) percentage that they are prepared to offer.
If you have enough equity in your home, you can remortgage and release some cash to put down a deposit on a new home. You can then let out your current home and use the rental income to cover the mortgage on your existing home.
Let-to-buy is also a popular option with couples wanting to move in together, but each have their own property. In this case, you could both move into one of the properties and rent the other one out using a let-to-buy mortgage.
Essentially you will have two mortgages when taking out a let-to-buy mortgage, and this can be worrying for some people. But ‘let-to-buy’ mortgages can also ease the time pressure when you are in a property chain as you’re not reliant on the vagaries of the property market to sell your existing home to fund a new one.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Most Buy to Let & Let to Buy mortgages are not regulated by the Financial Conduct Authority.