Buy to Let Mortgage Explained

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mortgage

Amongst the various types of mortgages available in the UK, buy to let mortgages are specifically for buyers who want to rent the property purchased.  Certain conditions apply for this type of mortgage, including affordability, a good credit record, earnings and age limit (usually 70 or 75 years when the mortgage ends).  The terms of a buy to let mortgage in UK have some specific differences from a typical mortgage and an experienced mortgage broker can offer the details required.

Maximum amount:  

The limit is usually based on the potential rental income.  Lenders generally agree that the maximum amount should be 25% to 35% lower than the expected rental.  For rental calculations, a letting agent or mortgage broker will be of help.

Deposit: 

The minimum deposit depends on the property’s value – it is usually 25% of the value, but can sometimes escalate to 40%.

Interest: 

Rates are usually higher on buy to let mortgages.  Most of these mortgages are interest only, where only the interest amount is paid monthly, and the capital amount is paid at the end of the mortgage term.  However, repayment mortgages are also available, where the interest and a part of the loan, are repaid monthly.  This means an increased monthly payment but will save much on the capital amount at the end of the mortgage period.  Lenders have different repayment terms, so advice on this should be sought from the best broker.

Remortgages: 

BTL remortgages can be arranged by switching to another deal, usually at a lower interest rate, once the current mortgage is over.  Remortgages can also be arranged before the existing mortgage matures, but this will involve higher fees. The lenders usually require a minimum time limit after the title deeds are transferred to agree to this.  An experienced broker will be able to advise on the best BTL remortgage deal suitable to your requirements.

Taxes: 

Capital Gains Tax and Income Tax are payable on BTL properties.  The CGT can be reduced by offsetting legal and estate agent fees or even losses from another BTL property sale.  There will be a relief of 20% on the total mortgage interest payment for income tax, but mortgage interest cannot be deducted from rental income.

Legislation: 

A Business BTL mortgage, applicable to those who are buying property for business rental and have previously purchased property for renting out, is not covered by the legislation. On the other hand, a Consumer BTL mortgage is where the property is to be rented to a close family member and is treated as a regulated mortgage contract.  

Tenancy Agreement:

The lender will require the buyer to have an AST (Assured Shorthold Tenancy) agreement outlining all relevant aspects.  This provides security for the buyer, the property and the tenant.

Conclusion: 

The pros and cons of a BTL mortgage should be explored to arrange the best bespoke deal.  Consideration needs to be factored because the property may remain untenanted at times, and financial cover should be available.  To make the right decision, the expertise of the best mortgage brokers can be invaluable!