When purchasing a buy to let investment property, you might not always have the funds needed to purchase the property outright.
This is where a buy to let mortgage comes in.
Buy to let mortgages can be used to help you pay for your investment, but there are some cases in which mortgages can’t be used, and certain things you need to know before looking into using a buy to let mortgage.
Deposits, tax and interest are just some of the elements you will have to tackle to make your investment journey as smooth as possible.
For more information on how to obtain a buy to let mortgage and the differences compared to residential mortgages, take a look at this simple guide.
Buy to Let Mortgages Explained
A buy to let mortgage is very similar to a regular, residential mortgage.
Money is loaned by a provider to help cover the initial purchase cost of a property, and the loan is repaid every month by the property owner over a set time period.
However, in the case of buy to let, this type of mortgage is for landlords who intend to rent out the property rather than living in it themselves.
Work Out Your Mortgage Payments
Before moving forward with a buy to let investment, you need to work out your potential mortgage payments.
The buy to let mortgage calculator below will reveal the potential mortgage repayments for your investment.
How to Get a Buy to Let Mortgage
It is all well and good having a buy to let mortgage explained, but how do you go about getting one?
Much like a regular mortgage, there are certain criteria you need to meet before you can set up a buy to let mortgage.
Generally, to get a buy to let mortgage you need to be purchasing a house or flat for investment purchases, and should have a good level of financial stability to be able to keep up with mortgage payments.
To give you a better idea of the criteria you need to meet before applying for a buy to let mortgage, here are some of the rules behind buy to let mortgages which you’ll need to know about.
You Should Already Own Your Own Home
To be able to use a buy to let mortgage for your investment, you need to already own your own home, whether this is through an outright payment or with the help of a residential mortgage.
For instance, you couldn’t take out a mortgage on an investment property while still renting or living elsewhere, as mortgage lenders may question whether you would then start living in the property yourself.
There’s also the fact that buy to let mortgage lenders tend to be cautious of first-time buyers as they consider this quite a risky option.
If you already own a residential home, you’ll be viewed as a lot more trustworthy and able to keep up with mortgage payments, helping you find more mortgage lenders to work with.
You Need to Earn a Certain Salary
To obtain a buy to let mortgage, you need to earn a salary of £25,000 or over.
This is usually the minimum income that a mortgage lender will accept before they let you use a buy to let mortgage to pay for your investment.
While some lenders will accept a lower personal income, you’re likely to have an easier time finding a mortgage lender if you earn at least £25,000 a year.
Age is also a factor to consider.
You need to be at least 25 to use a buy to let mortgage, but many lenders also require borrowers to be below a certain age.
Typically, you should be no older than 70 or 75 by the time your mortgage ends.
So, if you were to take out a 25-year mortgage, you would be 70 by the time the mortgage payments ended.
This can vary between different lenders, so it’s something that’s worth querying.
The Property Should Be Completed
When agreeing on a buy to let mortgage, you might find it more difficult to find a lender who will loan you the money for an off-plan property.
Off-plan developments are those which haven’t yet been completed.
Because the property isn’t yet a tangible and completed asset, a lot of mortgage lenders view off-plan investments as a risk, especially since the completion date can change.
If you’re thinking of buying an off-plan property, you should weigh up the benefits of this type of investment against the disadvantage of not using a buy to let mortgage.
For instance, off-plan investments are offered at below-market rates which means you have less to pay for the investment.
There’s also the benefit of added capital growth that you can often gain from an off-plan investment.
Taxes and Interest Rates for Buy to Let Mortgages
It is important to consider that the arrangement fees are a lot more substantial than residential mortgages, and the conditions for obtaining a buy to let mortgage are a little different.
For example, the minimum deposit requirement is 25% of the property purchase price compared to only 5% which is needed by mortgage lenders of regular property.
This is one of the differences between residential mortgages and buy to let mortgages, but there are some additional discrepancies to think about.
With that in mind, here’s some information on buy to let mortgage interest rates and taxes that investors should keep in mind.
Higher Interest Rates
Interest rates tend to be higher, with many buy to let mortgages being interest-only.
This means that you don’t have to pay the interest every month, but you must pay in full when the mortgage term has concluded.
An ideal approach for long term investments, its positive features include the preservation of cash ﬂow throughout the duration of the mortgage which allows investors to expand their portfolio further.
However, your individual investment strategy will determine whether you take this interest-only path or opt for a repayment plan.
This would entail owing monthly repayments with interest payments on top.
A plan like these suits those who want to keep their portfolio of properties to a minimum, and gives peace of mind that the mortgage will be paid off in full at the end of its term.
Tax Relief on Buy to Let Mortgages
Many alterations have been made to tax relief on buy to let mortgages and it’s important to stay in the know with the latest changes.
A reduction in the tax relief you can receive will be rolled out nationally by 2020.
A rate of 20% will be in action for any landlords in buy to let who will have to pay tax on the full amount of rental income received on a property.
This makes a change from the previous tax relief laws that permitted landlords to pay tax solely on rental income before mortgage expenses and interest deductions (also known as NET rental income).
Top Tip – Weigh up Your Buy to Let Options
Now that you understand more about buy to let mortgages and the criteria you need to meet to use them, you should weigh up the pros and cons of this investment method.
If you want to invest in an off-plan property to benefit from the lower rates, higher capital growth and modern, new-build design, you should consider paying for your investment upfront.
Here at RWinvest, we have a range of affordable off-plan investment properties in high-growth areas for you to explore.
For more information, get in touch with our offices today or take a look at our latest UK opportunities.