Buy-to-let mortgages explained
If you’re planning on purchasing a property to let out and require the funds to do so, you won’t need the same kind of mortgage as for a home you’re purchasing to live in. Instead, you’ll need a buy-to-let mortgage.
Some reasons for buying to let…
Provided the property can be let out and the rent is paid, buying to let can provide landlords with rental income. It can be an alternative to saving money in the bank, particularly when interest rates are low. However, it is important to note that interest rates can be subject to change.
…and some considerations
A mortgage for buying a property to let is similar to a mortgage for buying a home to live in, but there are some key differences. These include bigger deposits and higher interest rates on buy-to-let mortgages. Deposits can normally be at least 25% of the value of the property, but this can go up to 40%.
As of April 2016, the Government announced a hike in Stamp Duty Land Tax (SDLT) for homeowners in England, Wales and Northern Ireland with second homes, including buy-to-let properties. This is usually 1% of the net present value for homeowners buying their first residential property. However, if you already own a home and are planning on buying to let, there is an additional 3% SLDT charge on your new property.
As is the case with residential mortgages, buy-to-let properties could be repossessed if the required monthly interest payments or repayments are late or not made at all.
What types of mortgage deals are available?
Buy-to-let mortgage deals can vary. Generally speaking, fixed rate mortgages allow landlords to know what costs to budget for. However, variable or tracker rates – which are subject to change – can sometimes be cheaper.
What are some of the conditions for a buy-to-let mortgage?
Different banks and building societies will have their own set of criteria for buy-to-let mortgages. In general, though, you’ll be subject to:
- Minimum or maximum age restrictions, or an age range
- A minimum income, usually around £25,000
- A limit on the number of buy-to-let mortgages you can have
- A limit on the total amount that that the they will lend to you
- Affordability checks
Buy-to-let affordability checks
It’s useful to know what kinds of checks may be performed before you apply for a buy-to-let mortgage. As with a standard mortgage, anyone applying for a buy-to-let mortgage is subject to affordability checks. These include your credit history, credit balances and whether you’ve shown that you’re able to repay their debts on time. Your identity will also need to be confirmed, usually by a current address on a UK electoral roll. This type of information can typically be found on your Equifax credit report. Your credit score could also be useful to help you understand how a lender may view your creditworthiness.
In addition to these, new Buy-to-Let guidelines issued by the Prudential Regulation Authority (PRA) taking place from 1 January 2017 include affordability tests that lenders have to consider when deciding whether or not to issue a buy-to-let mortgage. These include borrower’s costs (including tax liabilities), verified personal income and possible future interest rate increases.
For more information on credit scores and mortgages, please have a look at the other articles in our Knowledge Centre. You can also find out more about your Equifax Credit Report & Score here - it’s free for the first 30 days, then £14.95 per month.
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