What is a buy-to-let mortgage?

A buy-to-let mortgage is one aimed at a prospective landlord who wishes to purchase a property with a view to letting it out. They operate in a similar (but not identical) way to a normal mortgage. The main difference between a buy-to-let mortgage and a more conventional residential mortgage is that in the assessment of a buy-to-let mortgage, the potential rental income is taken into account. The rates of a buy-to-let mortgage are usually higher than those for a residential mortgage whilst the loan to value (the amount you can borrow compared to the value of the property) is usually lower.

There is a great summary of the differences between residential mortgages and buy-to-let mortgages here: moneyfacts.co.uk, but to summarise they include:

• Higher fees
• Higher interest rates available
• Usually a minimum deposit of 25% of the value of the property

Why people want them and what you might need?

The BVA BDRC ‘Buy-to-Let Barometer’ for the fourth quarter of 2018 notes that whilst confidence amongst landlord in their own lettings business has declined with only 38% feeling ‘good’ or ‘very good’ about their prospects, 62% still plan to use a buy-to-let mortgage to fund their next purchase. Buy-to-let mortgages aren’t going anywhere and are still a key way to purchase a property with a view to letting it.

Some industry experts are positive about the future suggesting that ‘buy-to-let’ mortgages and the private rental sector in general are set to remain strong. With this in mind, what position do you need to be in to take advantage of a buy-to-let mortgage?  

Buy-to-let mortgages are suitable for people who:

• Are considering investing in a property.
• Have an understanding of the challenges and risks in the process of investing in property.
• Have a good credit history
• Are already a property owner

Personal loan vs company loan

Here is where it can get a little complicated, so buckle up…

There is a difference between getting a buy-to-let mortgage as an individual and getting one as a limited company. As an individual, you can be assessed for a buy-to-let mortgage, but your assessment will be based on a combination of your salary plus the income you’ll get per year from renting the property. So if, say, you are a teacher with a £30,000 salary and you wish to purchase two properties each projected to rent out for £9000 per year, the amount you will be assess for will be £48,000. This means the teacher is in a higher income tax bracket which will make the lending stricter and the potential income tax charges higher.

There is a chance that purchasing a property through a limited company might increase your cashflow as they pay corporation tax as opposed to income tax, but it is not always as simple as this.

The First Step

The bottom line is buy-to-let mortgages are an opportunity, but they can by complex. The best way forward is to take advice on your best option from the experts. We recommend you either get in touch with us first or check with a reputable accountant about what steps you may wish to take. We recommend Shane Cann, a director of Bush and Co. Chartered Accountants. Alternatively, if you have already decided on your financial approach, get in touch with us and let us take care of the research to find you the most suitable deal for your situation.