Buy To Let

To Let sign – source unknown

Thinking of becoming a landlord? Already own Buy to Let properties and need help financing them?

All the things you need to know about your Buy to Let mortgages and the journey to becoming a landlord.

A buy to let (BTL) mortgage is for any property that the owner or an immediate member of their family has not occupied as their main residence and the owner wishes to rent the property as a residential property to make a profit.

The majority of lenders will require a minimum of a 20% deposit for a purchase of a BTL property, but this is something we can discuss in our initial consultation. If you are remortgaging a BTL property, the lender will require proof of your rental income and a copy of the tenancy agreement that is in place for that property. Most lenders will only accept an Assured Shorthold Tenancy Agreement (AST).

Interest Only Mortgages

Most landlords prefer to take their BTL mortgage on an interest only basis. This means that the monthly mortgage payments only pay the interest on the loan and do not repay any of the capital off the loan amount. Landlords prefer this method as it helps to maximise the rental income they receive. The monthly repayments are lower on an interest only mortgage so during any periods where a landlord does not have a tenant in the property, and therefore is not receiving any rental income, the low payments are not as much of a burden.

If a BTL mortgage is taken on an interest only basis, the lender will require you to have a ‘’repayment vehicle’’ in place to repay the loan at the end of the term. This can be in the form of your intention to sell the property at the end of the mortgage term, but not all lenders accept this as a repayment vehicle. It may be a requirement that regular payments are made into a savings account to build up the funds to repay the loan. Lenders have a requirement to check that your repayment vehicle is performing as expected and will be able to repay the loan. However, it is ultimately the responsibility of the borrower (the landlord) to ensure they have the means to repay the interest only mortgage at the end of the mortgage term.

Please be aware that all income received from rental properties must be declared to the Inland Revenue and are subject to tax. A lender will expect to see the income and individual receives from land and property on their tax returns. More and more lenders are requesting the proof of rental income in the form of a tax return in addition to bank statements and the AST as proof of the rental income received.

What can you borrow?

Lenders use a calculation based on the rental income received and also what tax bracket you as an individual fall into.

There is also a ”coverage ratio” that is used to make sure the rental income will cover the amount of the mortgage repayments in the event of an interest rate rise.

Types of Landlord

What category are you?

There are different classes of landlords from a lender’s point of view. Landlords are classed as non-portfolio or portfolio landlords.

Non-Portfolio Landlord

A non-portfolio landlord is a person who owns less than 4 BTL properties that are mortgaged. These properties can be a mixture of flats, houses and bungalows.

Portfolio Landlords

These are landlords who own more than 4 mortgaged BTL properties. If a landlord owns 10 BTL properties, but only 1 of the properties has a mortgage on it, the lender will not class the landlord as a portfolio landlord in most cases. As with a non-portfolio landlord, these can be a mixture of properties.

Limited Company Landlords

A recent trend in the landlord world has been to treat your BTL properties as a proper business. You can set up a limited company that has the permissions to buy, sell and rent properties and be a director of that company paying yourself a salary plus dividends.

There are tax benefits for landlords doing this, but you need to discuss this with an accountant first to make sure it is financially beneficial to you. Remember, if you own a Limited Company you will have to file company accounts annually.

Types of Tenancy

The type of tenant that a property is let to will dictate the lender and type of mortgage product available to a landlord. A lender will ask to see a copy of the tenancy agreement during the application stage. Below are the most common types of tenancy within the UK.

Assured Shorthold Tenancy (AST)

A single house, flat or bungalow that is rented as a whole unit to an individual or family unit under one tenancy agreement. This is the most common form of tenancy agreement in the UK.

House of Multiple Occupancy (HMO)

A single property that has a communal kitchen area, but separate bedrooms with en-suite showering facilities. Rooms typically are numbered and have their own locks. These can be rented on one tenancy for all occupants in the property, or individual tenancies – one per room. Some lenders require the property to be under one tenancy agreement, others are happy for the rooms to be let on individual tenancies. HMOs are popular in cities and towns where there are universities and also where the rent is high, such as London. It is common for HMOs to be registered with the land registry and the local authority. The local authority will issue a licence to the landlord confirming that the property is suitable to be rented out as an HMO property. Please check with the local authority in the property’s area for more information on the council’s requirements.

Housing Association/Local Authority

Due to a shortage of social housing it is possible for a landlord to rent their properties to the local authority. There are benefits of this for the landlord as the tenant pays their rent to the council/housing association in most cases and this is then paid to the landlord. The property is managed by the council/housing association so the landlord does not have to deal with the tenants directly.

Holiday Lets

Holiday lets are more specialist and do not require a tenancy agreement. The lender will normally require that the property is managed by a holiday lettings company.