Buy To Let
Over recent years many people have turned their backs on the stock market, preferring to invest their money in property in the hope it will bring them the financial security required for their retirement.
When buying a property to rent, the mortgage is possibly the most critical factor. You cannot take out a typical residential mortgage. However, most banks and building societies offer buy-to-let mortgages specifically for Landlords.
A buy-to-let mortgage is comparable in most ways to a residential mortgage. However, there are some differences. Firstly, the interest rate is typically higher. You will also require a larger deposit on a buy-to-let mortgage – a minimum of 25% is usual, although many of the most competitive mortgages demand 40% plus. Lenders are also more relaxed about Landlords arranging interest only mortgages, to allow for better cash flow.
With a buy-to-let mortgage, lenders look at the expected rental income and don’t assess the mortgage on your personal income, as they would with a residential mortgage. Typically, lenders insist that the monthly rental income must equal anywhere from 125% to 150% of the monthly interest payments.
The tougher conditions reflect the higher risk of buy-to-let mortgages, as statistically borrowers are more likely to default on a buy-to-let mortgage than residential mortgages.
Most banks and building societies insist on a minimum age, often 25. Also, they often require a minimum income, usually around £20 to £25,000 per year. Each buy-to-let lender has their own restrictions on how many buy-to-lets they will allow you to have.
The choice will typically include fixed rate and tracker mortgages. Arrangement fees often apply – and they can be much higher than residential mortgages. Sometimes these fees can be fixed or charged as a percentage of the mortgage amount.
In April 2016 the Government introduced a 3% stamp duty surcharge which is applied when people purchase additional residential property. Then in April 2017, the Government started to phase in more stringent income tax treatment of buy-to-let investment for high rate taxpayers. As a result of these changes, the upfront purchase costs have increased, and potential financial returns of buy-to-let investment have reduced. These changes would need to be factored in when deciding if buy-to-let investment is the right choice for you.