What is a Buy-to-Let mortgage?
A Buy-to-Let (BTL) mortgage is specifically designed for landlords who rent out a property. BTL mortgage conditions specifically prohibit the owner from occupying the property.
You will need a BTL mortgage if you intend to borrow to purchase a property that you want to rent out. If you rent out a property which is on a residential mortgage, then you will be breaching your mortgage contract.
Generally, BTL mortgages are not regulated by the FCA, although there are some exceptions which we will highlight in this guide.
What types of Buy-to-Let mortgages are available?
Standard BTL Mortgage – These are for individuals who own an investment property in their personal name and rent the property out to a private tenant, usually with an Assured Shorthold Tenancy agreement (AST). This would be an unregulated loan and typically a lender would calculate affordability based on the monthly rental value.
Consumer Buy-to-Let Mortgage – There are two types of consumer Buy-to-Let mortgage:
- Family Let – This is a BTL property which is let to a family member. As the property is occupied by family, the transaction becomes regulated and typically affordability will be calculated based on personal income. This is because the lender wants to be satisfied that the mortgage would be paid in the event that the family member stopped paying the rent.
- The ‘accidental’ landlord – This type of mortgage is most often referred to as a let-to-buy. The let-to-buy mortgage allows an individual to convert their existing home to a BTL property and raise additional borrowing against it to fund the deposit on the next home. The new BTL mortgage is regulated because the individual, or their family, previously lived in the property.
Holiday Let Mortgage – This type of mortgage is intended for properties that will be let throughout the year to short-term guests as holiday accommodation, often using platforms like Airbnb. Affordability is generally calculated based on an average of high, medium and low season rental income figures.
Limited company BTL Mortgage – This type of BTL mortgage is for properties that are owned via a limited company rather than in a personal name.
What types of repayment options are available?
Repayment mortgage – This option is structured to gradually repay the entire loan amount over the full term of the mortgage. Repayments to the lender are usually taken on a monthly basis and consist of both a capital repayment amount and an interest amount.
Interest-only mortgage – With an interest-only mortgage, your monthly payments solely contribute to paying the interest on the money you’ve borrowed. At the end of the mortgage term, you will still owe the original loan amount, provided you have not made any overpayments. A lender will require a suitable repayment strategy to ensure you have the means to repay the balance at the end of the mortgage term.
Part interest-only, part repayment mortgage – This type of mortgage combines the above two repayment options, which provides flexibility with monthly payments, as well as an element of certainty that the total balance will reduce over the term. A suitable repayment strategy is also required for this type of mortgage.
What types of rates are available?
Fixed – With this type of mortgage, the interest rate is guaranteed to remain the same for a fixed period, which can range from 1 to 15 years.
Tracker – The interest rate for a tracker mortgage is linked to the Bank of England (BoE) base rate. From the outset of the tracker term, the payable rate is set at a specific amount above the BoE base rate. A tracker rate is variable – if the base rate increases or decreases, the interest rate on your mortgage, and therefore your monthly payment, would subsequently increase or decrease in line with this.
Discount – Discount rates are also variable; however, they track at a set amount below the lender’s standard variable rate (SVR), either for a specified period or for the full mortgage term. These rates fluctuate in line with changes to the lender’s SVR, which is set by the lender and is in no way linked to the BoE base rate.
How is affordability calculated for a buy-to-let mortgage?
Affordability for Buy-to-Let mortgages is usually assessed based on whether the rental income will cover the monthly mortgage payment. Lenders typically require the monthly rental income to cover the mortgage payment by 125-145% (depending on whether you are a basic or higher-rate tax payer).
Additionally, the lender will apply a “stress rate” which is usually the product rate + 2%, unless you’re securing a 5-year fixed rate in which case the stress rate is the same as your product rate.
Let’s look at an example.
To calculate the maximum loan for a higher-rate taxpayer, receiving £2,000 in rental per month and taking a 5-year fixed rate at 5.49%:
(£2,000 x 12) ÷ 145% ÷ 5.49% = £301,488.
Some lenders can use “top slicing” to cover a shortfall in rental income, to help you achieve the required loan amount. Top slicing is where a lender looks to utilise your personal income, in addition to rental income, to support monthly affordability. When top slicing, the lender will also consider your committed monthly expenses (such as a residential mortgage) to ensure you have the means to cover the mortgage payment.
Why is a lower stress rate applied for 5-year fixed lending?
Stress rates are used to account for market volatility and act as a safety net for the lender and borrower by applying a ‘worst-case scenario’ to affordability calculations. The approach is different for 5-year fixed rates as there is reduced risk of the borrower being impacted by short-term market volatility. This enables an individual to borrow more as the stress test is more favourable when applying a standard BTL affordability calculation.
What are the tax implications?
Income from a BTL must be reported to HMRC as part of your personal tax return for properties owned in your personal name.
If you decide to sell the property, you may be liable for Capital Gains Tax (CGT).
We recommend that you seek advice from a specialist tax adviser to fully understand the tax implications of owning a BTL property.
What expenses can I deduct from rental income?
You can deduct property related expenses from your rental income when you work out your taxable rental profit, however these are generally limited to maintenance, repair, management and administrative costs.
Whilst you can no longer claim the mortgage interest as an expense with a standard BTL property, this tax benefit is still available to holiday let owners.
Expenses you can deduct if you pay for them yourself are:
- General maintenance and repairs to the property
- Water, gas, and electricity bills
- Insurance, such as landlords’ policies for buildings and contents
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Legal fees for lets of a year or less or for renewing a lease for less than 50 years
- Accountant’s fees
- Ground rent and service charge
- Direct costs such as phone calls, stationery, and advertising for new tenants
Expenses you cannot deduct:
- The full amount of your mortgage payment – only the interest element of your mortgage payment can be offset against your income
- Private telephone calls – you can only claim for the cost of calls relating to your property rental business
- Clothing – for example, if you bought a suit to wear to a meeting relating to your property rental business, you cannot claim for the cost as wearing the suit is partly for your rental business and partly to keep you warm – no identifiable part is for your property rental business
- Personal expenses – you cannot claim for any expense that was not incurred solely for your property rental business
What makes Henry Dannell different?
- Truly whole-of-market access – including exclusive, broker-only products
- Dedicated and accessible support every step of the way, from the initial call through to completion
- Extensive knowledge of various income structures, with expertise in those that tend to be more complex – we ensure lenders understand your income, avoiding potential hurdles that may be encountered without an experienced broker
- Comprehensive reports – detailing all mortgage options, highlighting the key features, tailored to your circumstances and objectives. Direct comparison of mortgage options.
For more information or support, please do not hesitate to contact our specialist team of advisers.
Please note: a mortgage is secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.