Last edited 16 Nov 2020

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Money Advice Service Researcher Website

Buy-to-let mortgage


[edit] Introduction

Buy-to-let (BTL) mortgages are for landlords who buy property specifically to rent out. They are usually more expensive than normal mortgages, but are often the first step for people wishing to become a property investor.

BTL mortgages first became used after the Housing Act 1988, which introduced the assured shorthold tenancy which gave potential landlords and lenders the confidence that tenants had a fixed period of residence in the property. This began to change attitudes towards property as a means of an alternate income, as before the 1980s, buying property to rent was predominantly only available to professional landlords with enough capital to provide large deposits.

Investing in property is risky, so a BTL mortgage shouldn’t be taken out if the risk is unaffordable. Buy-to-let mortgages are only suitable for people who want to invest in houses and flats, and it is difficult to acquire such a mortgage without already owning a property, whether outright or with an outstanding mortgage.

It is necessary to have a good credit record and not be stretched too much on other borrowings such as existing mortgage and credit cards.

Most of the big banks and some specialist lenders offer BTL mortgages. Before taking out a BTL mortgage it’s a good idea to talk to a mortgage broker as they can help with choosing the most suitable deal.

Lenders will have their own upper age limits - typically between 70 or 75. This is the oldest an applicant can be when the mortgage ends not when it starts. For example, if the applicant is 45 when taking out a 25-year mortgage, it will finish when they are 70.

[edit] How does buy-to-let work?

BTL mortgages are in many ways just like ordinary mortgages, but with some key differences:

  • Interest rates on BTL mortgages tend to be higher.
  • The minimum deposit for a BTL mortgage is usually a quarter (25%) of the property’s value (some lenders offer deals with a 20% deposit, others want a 40% deposit).
  • The fees tend to be much higher.
  • Most BTL mortgages are interest-only, which means nothing is paid off the lump sum borrowed each month but, of course, at the end of the mortgage term the capital must be repaid in full.
  • Unlike obtaining a mortgage on a property for living in, BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA) unless the applicant wishes to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). This means that most BTL mortgages are unregulated.
  • However, if the lender is FCA authorised, it will be expected to treat applicants fairly, and if not complaints can be made to the Financial Ombudsman Service.

[edit] How much can be borrowed?

The maximum that can be borrowed is linked to the amount of rental income that is expected to be received. Lenders typically need the rental income to be a quarter to a third higher than mortgage payment (25–30%).

[edit] Risks

It can’t be assumed that a property will always have tenants. There will almost certainly be ‘voids’ when a property is unoccupied or rent isn’t paid, and it will be necessary to have a financial ‘cushion’ to draw on to meet mortgage payments. Rent coming in can be used in part to top up the savings account.

There may also need to be savings for major repair bills or difficult tenants.

If house prices fall, the value of the property is likely to fall as well and it might not be possible to sell for as much as had been hoped. If this happens, the difference on the mortgage must be made up.

If the BTL property is sold for profit, Capital Gains Tax must be paid if the gain exceeds the annual Capital Gains Tax threshold. Also, rental income that exceeds mortgage interest payments and certain allowable expenses are liable to Income Tax.

[edit] Benefits

The main benefit of a BTL mortgage is that if the housing market does well, it may be possible to sell the property for a profit. It is suitable for those who:

  • Prefer investments that feel more tangible than stocks and shares.
  • Are willing to tie up money for a long period of time.
  • Understand property prices can go down as well as up.
  • Are willing to take the risk that they may not earn a profit on the investment.
  • Understand and accept the additional risks that go along with borrowing money to buy a property.
  • Understand and accept the costs and time involved in owning and running a property and the impact that this will have on the potential return.

This article was created by --Money Advice Service. It was originally published on the Money Advice Service website.

You can see the original article here.

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[edit] External references

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