For some people, concerns about the future performance of the stock market and the current low savings rates make buying a buy-to-let property a viable investment option. There is a significant demand for rental properties in specific parts of the UK, which has rendered the role of a landlord an attractive investment for both income and long-term growth.

What is the difference between a Buy to Let and a Residential mortgage?

The amount you can borrow on a residential mortgage is predominantly based on your income and expenditures. In the case of a Buy to Let mortgage, the available borrowing amount is primarily determined by the potential rental income the property can generate. The current minimum deposit for a Buy to Let is 20%, although only a limited number of lenders permit this. Most lenders in the market require a 25% deposit, offering more competitive rates compared to a 20% deposit mortgage. Interest rates on Buy to Let mortgages typically tend to be slightly higher than residential loans due to the increased risk to the lender, but the market is becoming more competitive for both property purchases and remortgages.

You have the option to structure your Buy to Let mortgage as either a capital repayment or an interest-only basis. Many landlords opt for an interest-only mortgage to minimize monthly payments and reinvest profits into future properties. The mortgage balance must be repaid through an alternative means, such as selling the property at the end of the term

Do you meet the criteria for a Buy to Let mortgage?

Numerous Buy to Let lenders in the market cater to various circumstances. Historically, buy to Let lending was limited to individuals meeting specific requirements, such as already owning a property or having a minimum income. However, as the market has grown more competitive, more lenders are willing to consider these applications.

How does a lender calculate the borrowing amount?

As part of the application process, a mortgage lender will arrange a property valuation. This valuation provides an estimate of the property's potential rental income, which is used to determine the borrowing limit. Each lender calculates this amount differently, leading to variations in the amount available for borrowing. A typical lender calculation involves estimating the interest payable on a mortgage at 5.5% to account for potential rate increases, then using 145% of this figure to cover property upkeep, taxes, and vacant periods. This becomes the required annual rental income. For example:£300,000 mortgage x 5.5% stress rate x 145% = £23,925 required annual rental income (£1,994 per calendar month)

What should you do if the rental income falls short of the lender's criteria?

A recent development in the Buy to Let mortgage market is the introduction of "top slicing" personal income. In this approach, the lender factors in your available disposable income when assessing the rental income. For instance, if the property is estimated to generate only £1,500 per month in rental income but you have an additional £500 in disposable income, a lender may consider this in the application, allowing you to meet the required mortgage amount. Some lenders might use a different stress rate for calculating rental income. Opting for a 5-year fixed-rate mortgage may increase the borrowing capacity.

A significant majority of new Buy to Let purchases are now made through limited companies. There are advantages and disadvantages to this approach, and it may not be suitable in all cases. Our adviser can assist you in assessing the pros and cons of this structure and, if necessary, involve an accountant from I.I Financial Services to clarify the tax implications, helping you determine the most efficient structure for your situation

What other potential costs should you consider?

When buying a Buy to Let property, there are various expenses to account for, such as maintenance, periods of property vacancy, and several taxes:

• Stamp Duty Stamp Duty may be applicable, depending on the property's value, similar to any property purchase. First-time buyers do not qualify for First Time Buyer Stamp Duty Relief on a Buy to Let property. If you already own another property in your name, an additional 3% surcharge applies.
• Income Tax You must declare your total rental income alongside other income on a self-assessment tax return each year. The rate of income tax payable depends on your total income. You can disclose expenses related to your Buy to Let property, including mortgage interest, letting agency fees, legal expenses, and maintenance costs. The amount of mortgage interest you can offset is changing, and by 2020, you will receive a 20% tax credit for your mortgage interest, reducing your final tax bill by 20% of the interest.
• Capital Gains Tax While profits from selling your primary residential home are tax-free, you may be subject to capital gains tax on gains from selling a Buy to Let property. The rate of capital gains tax is currently 18% or 28%, depending on your total taxable income. However, there is an annual allowance before tax is payable; for the 2018-19 tax year, the allowance is £11,700.
• Inheritance Tax Any Buy to Let property you own contributes to your estate's value for inheritance tax purposes, minus any outstanding mortgage.

Fill in the form below & we will be in touch as soon as possible