Buy to Let

A buy to let mortgage (sometimes referred to as an investment mortgage) is designed for borrowers who want to let their property out to a third party (i.e. tenants).

More and more people are investing in property as a long-term opportunity to make profitable returns, and as a way of securing finance for their retirement.

Becoming a private landlord should not be seen as an easy way of making money. It can be riskier and more complicated. It can also be time consuming and there is no guarantee that house prices will rise. That said, having a second (or subsequent) property to let to tenants could reap considerable financial rewards over time.

There are now hundreds of competitive mortgage schemes available that are specifically aimed at the buy to let market, ranging from special offer buy to let mortgage deals to fixed and variable rate options.

Mortgage lenders will often assess buy to let mortgages on the earning potential of the property (i.e. the rental income) as well as your earned income and there are three main differences in buy to let mortgages:

  • Rental Income – lenders will consider the projected or actual rental income as part of their lending decision, as well as your earned income, in some cases.
  • Interest Rates – dedicated buy to let schemes will generally attract a slightly higher interest rate and higher fees.
  • Larger Deposit – lenders generally require a minimum of 20% or 25% of the property’s value as a deposit.

When buying a property to let, you will also need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit each month or are you looking to make a profit through increased equity? This decision may affect the type of property you purchase, the location and the structure of the mortgage itself.

When you buy a property to let, you should also be mindful of the following additional costs:

  • Professional fees – most letting agents will deduct around 10% of the rental income for managing your let property. This is in addition to the cost of finding and vetting a suitable tenant.
  • Property Insurance – you will need to insure your let property. Your mortgage lender is likely to insist upon buildings insurance as a minimum level of cover.
  • Maintenance – you will need to maintain your let property and ensure that your Gas & Electrical appliances comply with current legislation.

It is also important to consider the tax implications of owning a buy to let property. There are two separate taxes which affect landlords:

  • Income Tax – a tax levied on money (or payment in kind) you receive as income after certain allowances have been deducted. The profit you make on rent received from your property is deemed income by the Inland Revenue and is therefore liable to Income Tax.
  • Capital Gains Tax (CGT) – a tax levied on the profit or gain you make when you sell or dispose of an asset. You usually dispose of an asset when you cease to own it, for example if you sell it, give it away as a gift, transfer it to someone else or exchange it for something else.

For more information regarding the tax implications of a Buy to Let property, you can contact your Local Tax Office or speak with an Accountant.