Buy to Let Mortgages

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Buy to Let is a property investment where the buyer becomes a landlord and rents out the property. The motivation behind this could be to make a profit on the rental income received or to take advantage of the capital growth of the asset. If the investor does not have sufficient funds to buy the property outright or wants to reserve some for another purpose, then the property can be bought with the help of a Buy to Let mortgage.

There are two types of Buy to Let mortgages. Business Buy to Let mortgages are for properties you purchase with the intention of renting them out to a third party. Consumer buy to let mortgages are for 'accidental landlords' for example where you cannot sell your current property when you move and decide instead to switch it to a Buy to Let. We can offer advice on both.

There are different ways to buy a BTL property. You can buy it in your personal name or via a LTD company, where the borrower sets up a limited company in the form of a special purpose vehicle (SPV), which is purely for the purpose of holding and letting property. The borrower then deposits funds into the limited company and the company then borrows the balance by way of a Buy to Let mortgage. This allows the company to purchase the property.

There are a couple of financial reasons why you might choose to own property as a company rather than an individual. Firstly, the way you are taxed on the rental income will differ slightly. If you own a property as an individual, the money you get from rent will be taxed as income tax, alongside your other earnings. If you choose to invest a property in your limited company, however, the profit you make will be liable to Corporation Tax instead, which is currently 20% for profits totalling £300,000 or less. The purchase structure you decide to adopt could make a huge difference to the amount of tax you pay, if you pay income tax at 40% or higher. Rental profits taken as salary or dividends will be classed as taxable income taken from the tax band that you fall into. There are ways, however, that you can take your dividends to maximise tax efficiency, or you can leave them within the company to use to purchase your next investment property. We do not provide advice on tax and suggest you speak to a tax specialist.

There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.

Buy to Let Facts

Lending criteria is different

For a Buy to Let mortgage the lender is more concerned with the rental yield of the property to support the mortgage payments, as opposed to your personal earned or self-employed income not from property. There is normally, however, a minimum level of personal income required to qualify, but there are exceptions to this. There are also lenders who will “top slice” and consider your personal income to support the loan if the rental income is not sufficient.

Interest rates are higher

Rightly or wrongly lenders view a buy to let property as a greater risk. Tenants are less inclined to look after the property than owner occupiers and are more likely to miss rental payments than an owner occupier is to miss mortgage payments. As a result Buy to Let mortgages have a higher rate of mortgage arrears. As a result of this Buy to Let mortgage rates are higher than their residential counterparts.

Can you rent out your current home?

If you decide to move home and retain your current residence as a rental property, there are some options to consider. The conversion of your residence into a Buy to Let property is commonly known as a let to buy. If you decide to move out of the property you could either change to a Buy to Let mortgage with a new lender, or speak with your current lender and obtain permission to let. Each lender is different, with some granting this permission with little cost, whereas some will not allow this or may levy significant charges. If you plan to stick with your current lender, you must inform them that you intend to let your home – failure to do so could mean a serious breach of contract. You can also release equity whilst converting your mortgage but this is only if you satisfy the lenders specific criteria and have sufficient equity.  There are various requirements to bear in mind when becoming a landlord such as arranging suitable insurance and having the relevant certification in place for you boiler and electrics, to mention but a few. Start Financial Services can guide you through all of these requirements.

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