Buy-to-Let Rules - What Are the Rules on Buy-to-Let Mortgages?

When owning buy-to-let property, even if you are using the services of a property management company, you have to perform the duties of a landlord and ensure your tenants are properly looked after.

You don’t want to earn a reputation as an untrustworthy landlord, as this will push away potential tenants and make it harder to fill your properties to keep collecting rental income.

With this in mind, it’s vital that you are aware of what buy-to-let rules you need to follow when owning investment properties.

The Tenant Fees Act 2019

The Tenant Fees Act covers what you can and cannot charge your tenants during their residence in your property.

Under the act, you can only charge money for:

• Rent.
• A refundable security deposit.
• A refundable holdings deposit.
• An early end to the tenancy agreement (at the tenant’s request).
• For requesting changes to the tenancy agreement during a fixed term (capped at £50).
• A fee for loss of keys or late payment of rent.

The Tenant Act also covers buy-to-let rules for deposits that you need to be aware of. Since 2019, landlords must:

1. Ensure their deposits are protected through one of three government-registered schemes (The Deposit Protection Service, My Deposits or The Tenancy Deposit Scheme) within 30 days of receiving it.
2. Provide tenants with a list of prescribed information, which includes the amount of the deposit, where it is being protected and the contact details of the scheme, the address of the property and your contact details as the landlord.

You also cannot charge:

• A deposit of more than five weeks’ rent if the annual rent is under £50,000.
• A deposit of more than six weeks’ rent if the annual rent is over £50,000.
• More than one weeks’ rent as a holding deposit.

Minimum Energy Efficiency Standards

Another buy-to-let rule you need to follow as a property investor is to make sure your investment properties meet the minimum energy efficiency standards required by the government.

With the effects of climate change becoming more and more apparent, the UK government requires all landlords to ensure their properties meet an Energy Performance Certificate (EPC) rating of an E at least.

EPCs are ranked A (most efficient) through G (least efficient), and last for ten years. There are heavy fines involved if you fail to get an EPC certificate.

There are several ways you can improve your existing buy-to-let property’s energy rating:

• Eco-friendly insulation is a great and easy way of helping to improve a property’s energy efficiency. It’s estimated that up to one-third of a home’s heat is lost through poor insulation, so ensuring the floor and roof insulation is fresh is a quick way of improving energy efficiency.
• Smart meters may be common in the UK right now, but this is for good reason. They are great at managing and monitoring energy usage and making smaller regular payments is often better for tenants than expensive monthly bills.
• Solar panels are really useful for creating renewable energy. While initially, they are a steep expense, they make up for this in the amount you save in the long run. They can also raise the value of a property while making it more energy efficient.

Electrical and Gas Safety Checks

On top of ensuring buy-to-let properties are energy efficient, landlords also need to check that the electricity and gas connections are safe for their tenants.

Every landlord needs to have an Electrical Installation Condition Report (EICR) carried out, which involves a registered electrician inspecting all electrical installations, including wiring and sockets.

A certificate is then handed to new tenants, which is updated every five years.

Every year, an annual gas safety inspection must be carried out by a Gas Safe engineer, and the certificate for this must be given to tenants within 28 days of it being carried out.

It is vital to keep on top of these, as not only will it potentially result in fines, but it could be unsafe for your tenants.

Right to Rent Checks

Before agreeing to terms with any tenants, buy-to-let landlords have to ensure they know who will be living in their property.

You have to check that any tenants over 18 are eligible to rent in the UK, which you can do by requesting documents like a British or Irish passport or proof of citizenry, or immigration documents if this is not possible.

If you own student buy-to-let property, you will likely need to ensure your tenants are registered students of the closest universities as well as the basic Right to Rent checks.

Evictions and Notice Periods

If you want to end the tenancy early, for whatever reason, it’s not as simple as showing up and telling your tenants to pack their bags. You need to follow the proper eviction procedures or open yourself up to legal action from your tenants.

There are two kinds of eviction notices you can serve to tenants, and these fall under very specific circumstances.

Section 8 notices can be served to tenants when they are in breach of the tenancy agreement, such as repeatedly late rent payments. The notice period will depend upon the reason why you are seeking to evict the tenants.

For serious repeated arrears of rent, you can give a notice period of two weeks, whereas severe antisocial behaviour may mean you can give four weeks’ notice.

Section 21 notices can be served when the tenant is not at fault, and may be served when the fixed term of a tenancy agreement is coming to an end, allowing you to regain possession of the property. You need to give a minimum of two months’ notice when serving a Section 21 notice.

HMO Licensing

Houses of Multiple Occupancy (HMOs for short) are a type of buy-to-let property where multiple tenants rent out rooms in the same property, sharing common areas like bathrooms, kitchens and living rooms.

To rent out an HMO, you might need to have a license to legally let your property out to tenants.

If the property is rented out to five or more tenants, an HMO license is mandatory. These are known as ‘large’ HMOs.

While you may not need a license for an HMO if you are renting to less than five tenants, you should check with your local authorities, as some areas require all HMOs to have a license, regardless of size.

Pets

Another new buy-to-let rule brought out in 2021 means that landlords are no longer allowed to issue a blanket ban on pets within their property.

This new standard tenancy agreement makes it easier than in the past for tenants with ‘well-behaved’ pets to secure a lease within rental properties.

In a statement on this new rule, Housing Minister Rt Hon Christopher Pincher MP said:

“We are a nation of animal lovers, and over the last year, more people than ever before have welcome pets into their lives and homes.

“But it can’t be right that only a tiny fraction of landlords advertise pet-friendly properties, and in some cases, people have had to give up their beloved pets to find somewhere to live.”

Just 7% of property investors and landlords allow pets within their properties. Hopefully, with these new rules in place, demand for rental properties will rise even further in the UK.

This is always good news for investors who want to reduce potential void periods and keep up a steady stream of tenant interest.

The other major set of rules you need to be aware of is regarding buy-to-let mortgages. You might likely want to borrow a buy-to-let mortgage to help you get started with property investment, so you need to know what to expect if you decide to borrow one.

Buy-to-let mortgage rules are different from traditional residential mortgages in several ways, so you need to go in knowing what to expect.

• The deposit for a buy-to-let mortgage is normally higher than for residential mortgages, with lenders often requiring a minimum deposit of 25% or higher.
• Rather than paying off the amount you borrowed, you instead pay back the accrued interest during the terms of the mortgage and pay the total cost of the mortgage at the end of the term.
• Buy-to-let mortgages have higher rates of interest than residential mortgages, with the current average fixed rate for BTL mortgages being 5.91% according to Which.co.uk, as compared to the average fixed rate for residential mortgages, which comes to 4.79% per Rightmove.
• Most buy-to-let mortgages are not covered by the Financial Conduct Authority (FCA), so neither lender nor borrower has as much protection.
• First-time buyers may struggle to borrow a buy-to-let mortgage, as mortgage brokers will want borrowers to have experience owning property and paying back mortgages due to the lack of protection. You should own your own home before trying to borrow a BTL mortgage.

There are other differences, but those are the main ones to be aware of. Because of the higher interest rates, the repayments on buy-to-let mortgages are often higher than what you would pay with a regular mortgage.

Estate agents and lettings agents may have recommended mortgage providers they can set you up with, but if the option is there to choose your own, it is best to research mortgage lenders to see who can give you the best mortgage deal.

As mortgage repayments are interest-only, lenders will assess the property to make sure you can make enough money from it to make the interest payments. They will use a Loan to Value ratio for this, also known as an LTV ratio. This is a common way of testing the affordability of a mortgage.

Most lenders will want your rental income to be at least 125% higher than your mortgage monthly payments, to ensure you can consistently pay back the interest. If your chosen investment property has assured rental yields, then this process is easier.

Some lenders may ask for a higher LTV of 145%, however, so be aware of this when shopping around for mortgages.

Buy-to-Let Mortgage Rules for Portfolio Landlords

Those who own four or more buy-to-let properties are known as portfolio landlords. Often, these investors use buy-to-let properties as their main source of income.

The Bank of England introduced new rules several years ago which makes it more difficult for these kinds of landlords to borrow more money through mortgages. These are more rigorous stress tests to make sure you can still afford to make your repayments.

Portfolio landlords will have to provide details of any current mortgage terms, cash flow projections and business models for their properties when applying. If you already have several BTL mortgages, it may be more difficult to borrow another.

Buy-to-Let Mortgage Tax Relief

Previously, investors could use buy-to-let mortgage repayments to help gain extra tax relief. This was done by deducting your interest repayments from your rental income, so you would pay less income tax.

This is no longer available to landlords, though. Instead, you receive a 20% tax credit based on the interest on your mortgage repayments. Be careful, as this may mean you pay far more in tax than you would have done before.