Buy to Let
How does buy to let work?
There are many ways to make money from property. But if you are looking to buy a property for the purpose of letting it out, then you will need a buy to let mortgage, unless you are buying the property for cash.
You will have to consider various new aspects of buying a property on your journey to becoming a landlord. To help you along the way, we have put together this intuitive guide that will take you through these aspects and clarify the buy to let process.
What is a let to buy mortgage?
Letting out your current home to buy a new home somewhere else requires a let to buy (LTB) mortgage for your current home. It is an alternative to getting a consent to let (CTL) from your current lender.
Interestingly, some lenders don’t accept a let to buy scenario as a basis for a buy to let mortgage application. Some lenders have special let to buy deals, while others just offer you the same mortgage deals as for a normal buy to let.
Deposit needed for buy to let
Most lenders require a minimum 25% deposit. There are options for 20% deposit and few lenders even accept 15% for a buy to let mortgage. However, because of the above-mentioned assessment rules, obtaining an 80-85% mortgage is not easy and the costs may be too much to make the purchase worthwhile.
The required deposit may also depend on the property itself. For example, new build and ex-council properties, especially flats, are often restricted to lower borrowing limits than older houses, and the lender could potentially ask for a 30-40% deposit.
House in multiple occupation (HMO)
The official definition is that a property is an HMO, if
- at least 3 tenants live there who are not part of the same household and
- kitchen, bathroom and toilet facilities are shared.
A household may consist of a single person, a couple or members of the same family who live together.
Although officially an HMO only needs a licence if
- the property is 3 or more storeys high and
- have 5 or more tenants live in it.
Having said that, different councils can have different requirements and you may be asked to obtain a licence, even if your property is smaller and/or has fewer tenants.
You can find more information on the official HMO government website here: https://www.gov.uk/renting-out-a-property/houses-in-multiple-occupation-hmo
Some people prefer to invest near where they live, while others are quite happy to have a buy to let property further afield, where they can get a better yield (return on investment).
For example, property prices in London may have shot up, but the increase in rent hasn’t followed, so the yield is relatively low. In contrast, prices may have stayed relatively low in Scotland, but rents compared to property prices represent a higher percentage.
Dependent on your target market, you may look for a location close to a university, hospital, transport links or good schools. Or may work with a council to identify suitable locations for their tenants.
Alternatively, you may look for up and coming areas, where you are likely to see relatively quick growth in property values. Whichever way you decide, the location has to support your strategy.
First time buyer first time landlord
Although not generally accepted by lenders, there are some exceptions. A growing pool of lenders are offering buy-to-let mortgages to first time buyer first time landlords.
You will typically need a minimum 25% deposit and the lender will want to feel confident that it is your intention to rent out the property instead of moving in yourself.
Costs of a buy to let mortgage
A buy to let purchase is perceived as higher risk compared to someone buying a home for themselves. This is reflected in the costs.
- valuation fee
- money transfer fee
- solicitor fee
- search fees.
For more info, please refer to the costs section on our “Buying a property” page https://www.bluewingfinancials.co.uk/buying-a-property/
Not a homeowner
You will find that your lender options are limited if you are not a first time buyer, but don’t currently own your home. Most lenders require that you own your residential home with or without a mortgage before buying a BTL property.
This requirement has the same reasons as the restriction behind lending to first time buyers: lenders want to avoid that you move into the property that you take out a buy to let mortgage on.
Buying in the name of a limited company
With the tax rules changing for landlords, it has become a common alternative to buy in the name of a limited company.
However, whether to buy a property in your personal name or in the name of a company has various tax implications. We recommend that you speak to an accountant or tax advisor before making a decision.
You don’t live in the UK
If you live abroad, your options will depend on your scenario:
- Are you a British or a foreign citizen?
- Have you ever lived in the UK?
- If you have lived in the UK before, do you intend to return in the foreseeable future?
- Do you currently own a property in the UK?
- If you own a property in the UK, is it on a residential or buy to let mortgage at the moment?
- If you receive rent in the UK, is it paid into a UK bank account and do you pay tax on it in the UK?
- Are you employed or self-employed?
- Do you get paid in the UK and do you pay tax in the UK?
- Do you have current credit history in the UK?
There are no right or wrong answers. The lender options and whether we can help you or recommend that you speak to certain lenders directly will depend on the details. Give us a call, so we can review your situation and make a recommendation as most appropriate.
Some properties are more acceptable for mortgage lenders than others. Consequently, the list below aims to help you understand when your mortgage options may be limited due to the property itself.
- New build flats tend to be sold for more than similar size older flats. Lenders view this as a risk, so often limit the maximum LTV to 50-70% in case of a buy to let mortgage.
- High-rise flats are either new build flats with the above-mentioned lender concerns or are often ex-local authority flats. If the latter, then it may mean that the area is less desirable or the block is not well-maintained. Either way, lenders often impose a limit of 4-5 stories in a block when it comes to lending on flats.
- Ex-council flats may also have their entrance from an open gangway, which lenders often deem as unsafe or undesirable. This entrance option is also referred to as “deck access” or “balcony access” and most lenders don’t accept it.
- Flats may also be above or near a commercial unit. If this commercial unit happens to be a pub, restaurant, take-away, launderette, hair dresser or another type of business likely to emit smell or noise, lenders often refuse to lend.
- Flats with short lease term remaining (less than 85 years) or with an absent freeholder or without a management company set up to manage the block of flats will also have an impact on the lender choice.
- Holiday homes and holiday lets are another specialist area that most lenders don’t touch. It is possible to obtain a suitable mortgage for them, but your lender options will be limited.
Rules and regulations
Being a landlord comes with various obligations as well, so make sure that you are clear about them.
- Energy Performance Certificate (EPC)
- Annual gas safety check
- Fire safety
- Electrical appliance safety test
For further details about the points above and rules around other buy to let aspects, like checking your tenants’ right to rent or how you can evict tenants, visit the official government website at https://www.gov.uk/browse/housing-local-services/landlords
The rental income received will be subject to income tax, although certain cost items can be deducted to reduce tax liability. Amongst others, these may include:
- Mortgage interest payment (not capital repayment element)
- Ground rent and service charge for flats
- Letting and management fees
- Other professional fees, such as accountant and solicitor fees
- Repairs and maintenance
We recommend that you speak to an accountant or tax advisor in order to ensure that you have the correct information and that your tax affairs are up to date.
Difference between residential and buy to let mortgage
Summary of residential and buy to let mortgage differences
|Residential mortgage||Buy to let mortgage|
|Who lives in the property||The buyer and/or close family||Not the buyer or close family|
|Perceived risk by lender||Lower||Higher|
|Acceptable agreement type||Lodger agreement||Tenancy agreement|
|Consent required for renting out||Not for lodger agreement, but if you move out and rent out the property, then yes||No|
|Basis of assessment||Mostly personal circumstances (eg. income, outgoings, age and more)||Rental income, the chosen property and personal circumstances|
|Mortgage payment method||Repayment method is the norm, though Interest only may be accepted||Interest only method is the norm, though Repayment method is accepted|
Consent to Let (CTL)
You have 2 mortgage options available when you move home and decide to rent it out rather than sell it. You could
- either obtain a consent to let from your current lender
- or remortgage to a buy to let deal with your current lender or a different lender.
If you are locked into a deal with an early repayment charge (i.e. penalty), then it may be too costly to remortgage to a new buy to let deal. In contrast, obtaining a consent to let may only cost you a few hundred pounds administration fee. However, some lenders may increase your current interest rate after granting a consent to let, so check the terms and conditions before signing an agreement.
A yield is simply the return you make on you buy to let investment. There are various ways to calculate it, so when someone mentions a yield figure, make sure you ask how it was calculated.
Some people calculate the yield as your rental income compared to your invested funds (deposit and other upfront costs), so make sure you know what you are being quoted.
What is the relevance of the above for a buy to let mortgage? During a mortgage application, the lender typically wants to know what your rental income and costs will be. They may not do the same yield calculation, but will use the same details for assessing affordability.