Buy to Let in the UK
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Who can get a buy to let mortgage?
Buy to let mortgages (BTL) are for landlords who wish to purchase a property to let it out. The rules around these mortgages are similar to normal residential mortgages but there are some key differences.
- You want to invest in houses or flats
- You can afford to take a risk – any investment is a risk which you should carefully consider before entering into
- Ideally you already own your own home, as this will give you more choice of Buy to let mortgages and lenders – although this is not essential
- You have a good credit record and are not stretched too much on other borrowing
- You are over the age of 18 , in some circumstances this is stretched to 21 or even 25 for come types of Buy to let mortgage
Buy to let mortgages are a lot like residential mortgages but with some key differences
- The fees tend to be higher
- Interest rates tend to be higher
- The deposit required to purchase is higher
- Most Buy To Let mortgages are taken on an interest only basis and affordability is calculated this way
- The amount you can borrow is linked to the rental amount you receive with a stress test applied
What are the benefits of buy to let?
Many people see property as an attractive investment and it remains a popular option in Britain. Buy to let offers a number of long-term benefits, including:
- Income from rental
- The possibility of rents increasing above inflation
- Potential value growth if property prices increase
If your property’s value rises, you stand to make a profit when you sell, especially if you buy in a booming area. Alternatively, if property prices remain stable, your rental income may be sufficiently high to pay off a large chunk of your mortgage and help build equity in the property.
Of course, there are no guarantees that property values will continue to rise, and you should consider the possibility of your property’s value staying the same over the years, or even decreasing if the market weakens.
Similarly, while rental incomes have grown strongly in certain areas, these may stabilise or drop off as the market shifts. Even if you buy in a high-rent area, your property may remain vacant, meaning you’ll need to cover mortgage payments out of your other income.
If you’re considering taking out a buy to let mortgage, it’s worth weighing up whether the property you’re considering is a good investment.
How to get a buy to let mortgage?
The buy to let mortgage market is quite competitive, but lenders still tend to be more cautious than before the financial crisis of 2007. Lenders will often use the following criteria to decide whether to approve a buy-to-let mortgage:
- Typically, you’ll need a 25% deposit on the purchase price.
- For new-build homes, you might be required to put down a 35% deposit, as these are seen as riskier investments by some lenders.
- Most lenders will ask for evidence that the market rate for rental income is at least 125% of the mortgage repayments
It can also be possible for first time buyers to take out a buy to let mortgage, although this can be a tricky experience depending upon your situation.
Do you qualify for a buy to let mortgage?
In addition to the above criteria, many lenders also insist on you meeting a range of personal criteria. Common factors that are taken into consideration include:
- Minimum age (often 25+)
- Minimum income (usually £25,000+)
- Successful credit check
Additional qualification criteria may apply for landlords looking to put together a portfolio of several properties – this is discussed in the ‘Experienced landlords – Setting up a portfolio’ section of this guide.
How to get the most from buy to let as a landlord
If rental income is your main priority as a property investor, it’s worth trying to maximise your rental yield. Rental yield is calculated by dividing the annual rent you will be earning from the property by the property value, which is then expressed as a percentage. For example:
Annual rent – £24,000
Property Price – £300,000
Yield – (24,000 / 300,000) x100 = 8%
But keep in mind that the rent you earn on the property will also go towards other costs, such as:
- Mortgage repayments
- Letting-agent fees
- Buildings insurance premiums
- General property maintenance
These costs will reduce the rental yield on the property. For example, if you spent a total of £1,200 per month on the above costs, your net income for the year will fall to £14,400 per year, producing a yield of just over 3%.
Annual rent minus costs – (£24,000 – £14,400) = £9600
Property Price – £300,000
Yield – (9600 / 300,000) x100 = 3.2%
Click here for a handy rental yield calculator
From this 3.2% you will also have to pay income tax. A full guide to tax that may be applicable to landlords can be found below.
You should also factor in the possibility of extended periods without rent – for example, if you struggle to find a tenant.
As this demonstrates, it’s vital to do your sums before embarking on a buy to let mortgage to ensure you are earning enough to make it a worthwhile investment.