Buy to let mortgages

| 4 min read

Are you looking to invest and generate a second source of income? Buy to let is a popular investment option. However, it would be best if you did your homework before you go about it.

What is buy to let?

Buy to let is where you purchase a property to further rent it out to tenants. Renting it out to tenants will generate rental income. The property may also grow in value and produce capital gain when you sell the property. The rent from the property should cover the cost of the mortgage and the expenses related to being an owner, such as building insurance, repairs, or letting agent's fee.

Buy to let mortgages

If you do not have the cash to purchase a new property, you will require a mortgage. However, standard residential mortgages do not normally allow that the property is let out. Therefore, you will need a buy to let mortgage.

The key points to note about buy to let mortgages are:

  • The amount you will be able to borrow depends entirely on how much rent can be generated from the property and the cost of the mortgage. Generally, mortgage lenders expect that the rental income be 25% more than the cost of the mortgage.
  • Some mortgage lenders may even require a minimum salary requirement.
  • The interest rates on buy to let mortgages are higher as compared to standard mortgages. This is due to the greater risk involved.
  • You will find that the minimum deposit requirement, generally, is 25% of the final purchase value. Furthermore, even the cheapest deals may require a 40% deposit.
  • Arrangement fees can also be higher as compared to standard mortgages.

Tax Implications for buy to let

Stamp duty

The current stamp duty rates will be in place from July 2020 till March 31, 2021. For buying a buy to let properties in England & Northern Ireland, you will have to pay 3% stamp duty surcharge on properties worth up to £500,000. For properties worth more, the current stamp duty rates are as follows:

England & Northern Ireland

Price of Property

Stamp Duty Rate

Stamp Duty Rate for Additional properties.

Up to £500,000

0%

3%

Over £500,000 to £925,000

5%

8%

Over £925,000 to £1.5m

10%

13%

Over £1.5m

12%

15%

 

Scotland

Price of Property

Stamp Duty Rate

Stamp Duty Rate for Additional properties.

Up to £250,000

0%

4%

£250,000 to £325,000

5%

9%

£325,000 to £750,000

10%

14%

Over £750,000

12%

16%

 

 Wales

Price of Property

Stamp Duty Rate

Stamp Duty Rate for Additional properties.

up to £180,000

0%

3%

£180,000 – £250,000

0%

6.5%

400,00 to £750,000

7.5%

10.5%

50,000 to £1.5m

10%

13%

Over £1.5m

12%

15%


For further guidance on stamp duty, please visit the page.

Income tax

Whereas, in the past landlords were able to offset their mortgage interest and mortgage arrangement fee against their income tax bills up to 45%.

Please note that this tax relief will be reduced in the future and will be capped at 20%.

Buy to let rental yield

You will have to access the buy to let rental yield if you want to know whether buy to let is financially viable. On average, the buy to let rental yield in the UK is around 5%.

You can figure the rental yield yourself. Simply divide the annual rent by the purchase price. Then multiply the figure by 100. This will give you the percentage of rental yield. You can also ask the estate agent to do this for you.

Rental Requirements

Under the new Prudential Regulations Authority rules, many mortgage lenders have introduced a rental requirement to reduce the risks involved.

What this means is that landlords will now have to achieve higher rents if they want to secure the mortgage. However, some mortgage lenders do allow you to use your income to meet the rental income shortfall. Therefore, you should shop around and find yourself the best deal.

What kind of property should you purchase?

If you are planning on purchasing a property to rent it out to tenants, you should consider the type of market you would want to sell to, i.e. students, young couples, family with children. It would help if you focused on aiming for people are the right choice for renters. You may want to rent it out yourself or have an agency take care of it for you.

Buy to let conveyancing

Buy to let conveyancing is a type of conveyancing which is specifically tailored for those who would be purchasing a property to further rent it out to tenants. Please see our article on buy to let conveyancing for further information.

What will be your responsibilities as a landlord?

  • Contract – You will have to provide your tenants with a contract, usually an assured shorthold tenancy.
  • Right to Rent – Tenants must have the right to rent in the UK. You should give every tenant a copy of the Government's How to Rent booklet.
  • Tenancy Deposit Protection – You should protect your tenant's deposit using government back schemes as Deposit Protection Service, Tenancy Deposit Scheme or mydeposit. You must also give your tenants details of how their deposit is protected.
  • Energy Performance Certificate – You must get an Energy Performance Certificate and give a copy to your tenant.
  • Maintenance – as the landlord, you will have to maintain your property so that it attracts tenants and protects your investment.

Please note that the information provided on this page:

  • Does not provide a complete or authoritative statement of the law;
  • Does not constitute legal advice by Net Lawman;
  • Does not create a contractual relationship;
  • Does not form part of any other advice, whether paid or free.
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