We caught up with Sam Lee, Senior mortgage and insurance advisor at Capricorn Financial, who told us everything about buy-to-let mortgages.
What are buy-to-let mortgages?
A buy-to-let mortgage does exactly what is ‘says on the tin’: you are purchasing a property for which the intention is to let out. The benefit of this, from an investment perspective, is usually twofold; for profit achieved from rental income, and for capital appreciation of the property value itself. Of course, there are several considerations and obstacles which are worthwhile taking into account before venturing into such a transaction. Property is naturally less liquid than many other ‘traditional’ investment types. Given that selling a property can take a number of months (if not longer), there may well be tie-ins or penalties on the mortgage itself, and tenancy agreements are typically for twelve months or more.
Time it well
The right buy-to-let (BTL) investment can be very lucrative however, particularly if timing the market right when purchasing and buying something which produces a high rental yield, but there are several costs and variables which all can have an impact on the bottom line. Factors such as tax, mortgage costs, upkeep and repairs, and quality of tenants all have significant influence.
How do they differ from other mortgages?
Firstly, BTL mortgages are not regulated by the Financial Conduct Authority, and so you don’t have the same level of protection as if it were your own home. That being said, a new category of BTL was introduced last year, known as Consumer Buy-to-Let (CBTL), which is now to be regulated. A CBTL is when a property is acquired and let out, but not solely for business (investment) purposes. For example, it was a previous main residence and you’ve decided to let it out rather than sell, or perhaps you’ve inherited a property from a family member which you’ve decided to put up for rent.
Just putting down a 25% deposit won’t guarantee you a BTL mortgage though, as most lenders also need to factor in the likely rental income, and others will take a look at overall affordability of each application. The majority of lenders will have their own rental income calculations, which essentially determines the maximum loan amount available based on the projected rental income. A common calculation is to ensure that the rent coming in is more than 145% of the monthly interest payments based on a stress tested rate of 5.5%. This is one of the harsher calculations, as in order to achieve 75% lending you would need a 5.98% rental yield. Some lenders can exercise more lenient stress tests, and it may also vary depending on the mortgage product itself. For instance, lenders are able to use lower stress tests if the rate is being fixed for five years or more.
The importance of tax banding
Certain lenders will also vary their calculations based on the owner’s tax banding, as essentially the net rental profit (after tax) is going to be greater for someone on a basic rate level of tax, compared to a higher rate tax payer based on the same figures. Tax banding is now of more significance, due to the recent changes in tax treatment on rental income, which are gradually being phased in over a four-year period.Being phased in by April 2020, all financing costs will only be deductible at the basic rate level of tax (20%), whereas currently 50% of the costs can be deducted at the higher rate, with the remaining 50% at the basic rate. As of April 2019, this will be reduced to a 25:75 split.
The affordability approach
Where the lending doesn’t fit within the standard rental calculations, some lenders will adopt more of an ‘affordability’ approach. They will look at the borrowers’ surplus income after stress testing all existing financial commitments, and if this proves to be sufficient, then lending can be obtained, even up to 75% of the property value. Those lenders who rely purely on the rental income stress tests quite often have a minimum income requirement of around £25,000-30,000, however you can find some lenders with no minimum income requirement, so long as they are existing home owners or landlords, and the lender is happy with the overall plausibility of the case. One of the lender’s main concerns here may be that the buyer’s intention is to actually move into the property, and is obtaining a BTL mortgage simply because a residential loan would otherwise not work.
The advantages of a buy-to-let mortgage
As you can imagine from the above, obtaining a BTL mortgage can seem a bit complicated, as there are many varying policies, rental calculations, lenders and products available. But don’t worry, there are plenty of advantages when it comes to investing in a BTL property such as having a regular rental income, long-term capital growth and security – even if you have a mortgage to repay.Whatyou need, whether a seasoned investor or first-time landlord, is an experienced mortgage adviser on hand, who can run you through all the available options and highlight any potential pitfalls along the way.
If you’d like any more information on how to apply for a mortgage, or help with choosing the one that’s right for you, give our property experts a call on 020 7078 0214 or email email@example.com.