Buy-to-let mortgage explained
Everything you need to know before applying for a buy-to-let mortgage
In this Guide:
A buy-to-let mortgage is a type of loan specifically intended for purchasing or remortgaging a property that will be rented out to tenants, rather than being used as the borrowers own home. The individual taking out the loan is referred to as the landlord, and they will enter into a tenancy agreement with the tenant(s), usually under an AST (Assured Shorthold Tenancy).
Molo offers buy-to-let mortgages to both individuals and limited companies. Limited companies established solely for the purpose of property investment are known as Special Purpose Vehicles (SPVs).
Who can get a buy-to-let mortgage?
Anyone really! However, there are a few things you’ll need first, such as a deposit, having a plan in place to either pay off the remaining loan or refinance at the end of your mortgage term and an understanding of how mortgages work.
Buy-to-let mortgages are for people who want to invest in properties and become a landlord, but they don’t have the cash to buy a property outright. Subsequently, you’ll need a buy-to-let mortgage in order to purchase the property.
The first step in getting a buy-to-let mortgage is to make sure you qualify by meeting the lender’s criteria. You can either do this yourself by researching mortgage lenders, or by going through a mortgage broker, who will make a note of your details and look for a mortgage matching your requirements.
Once you’ve found a mortgage lender and you think you qualify, you’ll need to submit a mortgage application and officially begin the process. Part of this includes passing an affordability check, but remember, each lender has a different affordability model which determines if you can cope with the costs of obtaining a mortgage. Generally speaking, affordability tests are devised based on income as well as credit data and your current financial commitments.
How do Buy-to-let mortgages work?
The majority of mortgages are paid on an interest-only basis, meaning every month of your mortgage term sees you only paying the interest due but nothing to repay the capital. For instance, if you take out a £200k loan on an interest-only balance, you will still have £200k in capital to pay at the end of the term.
Interest-only mortgages are a good way of keeping your monthly payments down to a minimum so you can receive more profit from the rental income. However, you must have a plan to pay back the loan in full or remortgage at the end of the term.
Capital repayment is the other option, which sees you pay both interest and the actual borrowed amount each month. You’ll reduce the amount owed using this method, but the monthly payments are considerably higher on a repayment mortgage.
Where can I get a buy-to-let mortgage?
You have two options when it comes to getting a buy to let mortgage: source it yourself by doing research and choosing the lender you think best suits your needs, or you can decide to use a mortgage broker.
A mortgage broker arranges the mortgage between you and the lender. They work with you and put your needs first to determine what type of mortgage is needed to find the best deal. Mortgage brokers can be helpful as they tend to save you time from having to research mortgages. Mortgage brokers will also be able to source more options as some lenders only offer mortgages through brokers.
Here at Molo, you can submit applications directly with us, as well as through a mortgage broker.
What is mortgage affordability?
How much you can borrow depends on the rental income of the property. Lenders use something called an interest cover ratio (ICRs) to determine how much you can borrow based on the rental income of the buy-to-let.
An ICR is a ratio to which the rental income must cover the monthly mortgage payments, and it’s tested on an assessment rate of approximately 5.5%. Higher fixed-rate products, such as a five-year fix, generally have a lower assessment rate.
The minimum ICR that a lender can use is 125%, and some lenders may even apply a higher ICR depending on the property type. For example a house of multiple occupation (HMO) tends to have a higher ICR. This means the anticipated monthly rental income must be at least 125% of the monthly mortgage payment.
When it comes to eligibility criteria, every lender is different and it all depends on their risk appetite. Most lenders have strict eligibility criteria but there are some that take a more flexible approach. That’s why it’s important to check your eligibility when looking for a mortgage, so there are no surprises.
Most mortgage lenders look at the following when deciding if you meet key lending requirements:
- Resident status and residency
- Income and affordability
- Credit history
How can I check my eligibility before applying for a mortgage?
- Age: Most lenders have a minimum age limit requirements and some may have a maximum age.
- Income: This covers employment earnings, bonus, commission, rental income, investments, pension and any benefit income you receive. Not all lenders accept benefit income.
- Commitments: Monthly outgoings, such as loans, credit cards, phone contracts, travel, childcare etc.
- Credit history: How have you handled previous credit? What is your credit score? Do you have any adverse credit history, such as county court judgments (CCJs), individual voluntary arrangements (IVAs) or bankruptcy?
- Employment status: If you are employed, self-employed, full time, part time, unemployed, retired or on a zero hour contract.
- Deposit: Savings, gifted deposit, investment drawdown, sale of a property or if you are raising capital on an existing property.
Mortgages are essentially products, and lenders have different options available to suit a wide variety of lending requirements. For instance, they will offer mortgage products at different interest rates depending on your deposit amount, or they provide interest-only and repayment products, over two, three, four, five years or longer.
When getting a buy-to-let mortgage, you don’t only need to think about the lender; it’s also important to consider the product they offer and if it’s right for your borrowing needs. Below, we outline the different types of mortgage products and what you need to consider before beginning the application process.
Yes, you’re able to apply for a buy-to-let mortgage as a first-time buyer. Now, most people’s first property purchase is a home to live in. Others, however, may go down the investment route and purchase a buy-to-let property.
While you can get a buy-to-let mortgage as a first-time buyer, it’s worth keeping in mind that many lenders won’t consider a first-time buyer for a buy-to-let mortgage because they’re seen as a higher risk. For instance, if you were to purchase a property with a buy-to-let mortgage with the intention of living in it yourself, this is called a backdoor residential mortgage and is a form of mortgage fraud.
In order to ensure that everything is done correctly, a reputable lender will carry out due diligence checks. These checks will verify the information provided in the application is accurate and may require you to be able to afford the property based on residential mortgage criteria. This is important because if the property isn’t affordable based on residential mortgage standards, it may indicate that the applicant’s motivation for purchasing the property isn’t genuine.
Purchasing buy-to-let properties as a limited company is often pursued as a tax-efficient strategy. The term “Special Purpose Vehicle” is used in the mortgage industry to refer to limited companies established for buy-to-let purposes.
The main distinction between buy-to-let SPV and personal investments is the tax payment structure. With an SPV buy-to-let, corporation tax is paid, whereas personal investments are subject to income tax. As a result, the restrictions on relief associated with personal investments, such as restrictions on mortgage interest tax relief, do not apply to SPVs since they are subject to corporation tax.
This is especially advantageous for higher-rate taxpayers who stand to benefit the most from using an SPV. You may want to operate a structured business model which includes a holding company and your LTD SPV being a subsidiary. This is what is known as layering and some lenders will not consider these.
Find out more, including direct comparisons between SPV and personal, below with our guide to SPV vs Personal buy-to-let properties.
You can get a buy-to-let as an individual in your personal name. Buy-to-let as an individual may also refer to joint applications made alongside others. Rather than a single person, individual refers to buying in your personal name instead of a Special Purpose Vehicle (SPV) or limited company.
Historically, this is the most common way to purchase a buy-to-let property. At the end of each tax year, landlords pay income tax based on their earnings (minus any taxable deductions). However, since the phasing out of being able to claim mortgage interest rates on your tax returns, a growing number of landlords have looked at purchasing a property through an SPV.
Unfortunately, transferring your current buy-to-let home from an individual to SPV is tricky as you’d need to pay the stamp duty and any capital gains tax due on property resulting from its value increase. For many, owning a buy-to-let property as an individual is still the most common way to be a landlord.
A house of multiple occupation (HMO) is a rented home shared by numerous people who consist of either a single person, families or cohabiting couples. Along with your usual responsibilities as a landlord, HMO owners need to adhere to several requirements before letting a house of multiple occupation. This, coupled with the extra tenants and the increased workload, means that it may be more difficult to obtain an HMO mortgage. There is more responsibility with HMOs, and many lenders consider them a higher risk. That means the lender might not be willing to lend or they will only do so on higher rates specifically for HMOs.
HMO mortgage criteria differs depending on the lender, but as a general rule of thumb, you can expect some additional requirements. These may include:
- Minimum property value, which could be between £75,000 and £100,000
- Minimum level of experience as a landlord, usually between 12 and 24 months
- Maximum number of storeys (usually no more than four)
- Maximum number of bedrooms, usually between six and eight
- No more than one kitchen in the property
- A communal seating area
- The maximum percentage of the property’s value you can borrow (known as the loan-to-value or LTV) is usually 75%
On top of these added requirements, you will also need to meet the lender’s standard buy-to-let lending criteria that covers age, income and credit reports.
Learn more about HMO :
A portfolio buy-to-let mortgage is specific for landlords who have multiple investment properties, usually four or more. Instead of mortgaging their investments separately, they take out a single mortgage to cover the entire portfolio. As a result, they hold their buy-to-let mortgages under one umbrella.
Instead of having several mortgage providers for each property, the portfolio is managed by just one lender. You also have one single monthly payment and statement, which makes it easier to keep track of everything.
Generally speaking, you are considered a portfolio landlord when you have four or more properties. However, things can get a little complicated, as the portfolio status revolves around the number of mortgaged properties.
To illustrate, if you own five properties, but two of them don’t have a mortgage, you won’t be considered a portfolio landlord. Likewise, if you own three mortgaged properties, you also don’t have a portfolio. It needs to be at least four mortgaged properties.
Once you have four or more buy-to-let properties with a mortgage, you will be subject to portfolio underwriting checks, also known as portfolio stress testing. Lenders need to ensure that you’re in a robust financial position, although the criteria depends on the requirements of the lender.
As a general rule of thumb, you can expect the following factors to be considered:
- Your landlord experience
- Previous and future cash flow from your portfolio
- Income from the properties and other sources, such as your job
- Details of current mortgages on your buy-to-let properties
Again, criteria changes depending on the lender, and it’s best to ask them for a breakdown of their requirements before applying. If you’re looking for a buy-to-let mortgage through a broker, they will take your details and give you options based on the details you provide.
Remortgaging a buy-to-let property is usually done to avoid going onto the lender’s more expensive Standard Variable Rate (SVR). But it’s also a great opportunity to see if you can reduce your monthly payments, shorten the remaining term or even borrow more to invest in another property.
Indeed, releasing equity is one of the most popular reasons for a buy-to-let remortgage, as it may provide you with the additional capital to purchase another investment property.
Remortgaging takes place when your initial deal, either fixed-rate or variable, expires. If you remortgage before the term ends, you may need to pay an early repayment charge (ERC), which is a percentage of the mortgage amount in conjunction with the length of time remaining on the initial deal.
With Molo, remortgaging a buy-to-let can is just as straightforward as 24 hours
A let-to-buy mortgage is when you rent out your current home and buy a new one as your primary residence. It requires having two mortgages, one for the property you’re renting out and another for the home you plan on moving into.
While that might sound like a gamble, it’s constructed in a way that mitigates risk. Let to buy sees you converting your existing mortgage into a buy-to-let. This enables you to let the property to a tenant and receive rental income. Next, you get a regular residential repayment mortgage on your new property, much in the same way you would if you moved after selling your previous home. If everything goes to plan, the rental payments cover the buy-to-let mortgage.The second part of the mortgage may be considered a consumer buy-to-let, which some lenders don’t offer. Therefore, it’s important to check with the mortgage provider beforehand.
A tracker mortgage is a type of mortgage linked to the Bank of England’s (BoE) base rate. The interest rate on a tracker mortgage moves up or down in line with any changes to the base rate, meaning your monthly mortgage repayments increase or decrease in line with interest rate changes. This type of mortgage is popular with many borrowers when interest rates are higher because you don’t lock yourself into a high interest rate.
There tends to be a fixed margin added to the base rate, which is set by the lender. So, while the rate will change in line with any movement in the base rate, the margin will stay the same. For instance, if the base rate is 4% and the margin is 1%, the interest rate on your tracker mortgage will be 5%. Tracker mortgages are usually available for a fixed period of time, after which you can either switch to another type of mortgage or continue on the lender’s SVR. It’s good to note that while tracker mortgages can be a solid option for some borrowers, they do come with a degree of risk as your repayments could increase if the base rate rises.
Green buy-to-let mortgages are a new(ish) type of mortgage product focusing on environmentally friendly properties. These mortgages are designed to incentivise landlords to invest in energy-efficient properties that have a lower impact on the environment. The key feature of a green buy-to-let mortgage is that the interest rate is linked to the energy efficiency of the property, with lower rates offered for more energy-efficient properties.
To qualify for a green buy-to-let mortgage, the property must meet specific energy efficiency standards, such as having an EPC rating of C or above. This encourages landlords to invest in measures such as insulation, double-glazing and renewable energy sources to improve the energy efficiency of their properties. In addition to the lower interest rate, some green buy-to-let mortgages may offer other incentives like reduced fees or cashback rewards.
Holiday let mortgages are designed for people who want to purchase a property and rent it out as a holiday home. These mortgages are different from standard buy-to-let mortgages, as they are specifically tailored to the unique requirements of holiday let rentals.
Holiday let mortgages typically require a higher deposit than buy-to-let mortgages, as lenders consider these types of properties to be higher risk. Moreover, the eligibility criteria for holiday let mortgages may be stricter, with lenders often requiring a proven track record of rental income, as well as evidence that the property will be in demand as a holiday rental.
Multi Unit Freehold Property (MUFP) mortgages are designed for investors who want to purchase a property with multiple self-contained units, such as a block of flats or a building with several apartments that are all under the one freehold. These mortgages are specifically tailored to the needs of landlords who want to rent out each individual unit separately, rather than renting out the property as a whole.
One of the key advantages of a MUFP mortgage is that it allows investors to purchase a property with multiple rental income, which can provide a more stable and diverse income stream. MUFP mortgages are typically designed to finance the purchase or remortgage of the entire property, rather than individual units. This means that the landlord can use the rental income generated by each unit to cover the mortgage repayments.
Bridging loans provide investors with the funds they need to purchase a property they intend to convert into a buy-to-let property. These mortgages are designed to bridge the gap between the purchase of the property and the time it takes to secure a long-term buy-to-let mortgage. Therefore, they act as shorter-term finance compared to traditional buy-to-let mortgages.
The short repayment period is usually between six months and two years. During this time, the borrower uses the funds to purchase the property and carry out any necessary renovations or refurbishments. Once the property is ready to be rented out, the borrower secures a longer-term buy-to-let mortgage to pay off the bridging loans. Bridging loans are often more expensive than standard buy-to-let mortgages, as they are designed to be a short-term financing solution.
LLP buy-to-let mortgages are designed for Limited Liability Partnerships that want to invest in rental properties. LLPs combine elements of traditional partnerships and limited companies to limit the liability of their members while retaining partnership flexibility. These mortgages allow LLPs to purchase a property for renting, with the rental income used to cover mortgage repayments.
They work similarly to standard buy-to-let mortgages, with the main difference being the legal structure used to purchase the property. The LLP must provide a deposit and meet certain criteria to be approved for the mortgage. This type of mortgage is popular with groups of individuals who want to invest in property together while sharing the costs and benefits of property investment, while also limiting their personal liability.
A buy-to-let offshore Special Purpose Vehicle (SPV) mortgage allows investors to purchase a property for the purpose of renting it out through an offshore company. Offshore SPVs are typically used by investors who want to take advantage of favourable tax conditions or to protect their assets.
The mortgage itself works in a similar way to standard buy-to-let mortgages, with the main difference being the legal structure used to purchase the property. Offshore SPVs are used to buy the property, with the rental income covering the mortgage repayments. These mortgages can offer tax benefits to investors, but they may also have higher deposit requirements and stricter criteria than standard buy-to-let mortgages.
Get a mortgage in principle
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- It won’t affect your credit score
- It takes under 2 mins
Whether you’re taking out a buy-to-let or a residential mortgage, there are two main types: repayment mortgages and interest only mortgages. Repayment mortgages are the most common for homeowners, while the majority of buy-to-let mortgages are interest only.
When you first start paying off your repayment mortgage, most of it goes towards the interest. The longer you pay your mortgage off, however, the more the interest decreases and you start covering the actual loan amount. Once you have finished your payments, the property is paid off entirely – you own it mortgage-free.
Interest only means that you just pay the interest on the loan, with the actual amount borrowed staying the same for the duration of the mortgage. Once the mortgage term is up, you’ll owe the initial amount borrowed – if, for example, you borrow £100k, at the end of the mortgage term you will still owe £100k. Borrowers need to prove they can pay off the entirety of the mortgage once the full terms have concluded.
Are buy-to-let mortgages interest only?
Yes, in the vast majority of cases, buy-to-let mortgages are interest only. There are repayment options available for buy to let, but you may find these are less profitable than an interest-only mortgage. A buy-to-let mortgage one interest only has cheaper monthly payments than a repayment option. Subsequently, you’ll receive more rental income as less of it will go towards the mortgage.
On the other hand, you won’t repay any of the borrowed amount. That means you’ll either need to refinance the loan when its term ends or pay back the entire mortgage amount, which may be hundreds and thousands of pounds. Most buy-to-let investors remortgage at the end of the term, although they may also decide to sell the property and use the achieved price to pay off the mortgage.
Why are buy-to-let mortgages interest only?
The majority of buy-to-let mortgages are interest-only because you pay the interest and nothing else. Doing so makes your monthly repayments lower, which means your profit margins for the rent received are higher than if your mortgage was on a repayment plan.
Some lenders may allow you to borrow up to 95% of the value of a property, meaning your deposit would be as little as 5%. For instance, if you bought the property for £250,000 with a 95% loan-to-value (LTV), you would only need a deposit of £12,500. In this scenario, you can expect higher monthly mortgage payments – the lower your deposit, the higher the loan amount.
It’s also worth noting that most buy-to-let lenders don’t offer 95% mortgages. Instead, it’s more common to find mortgage products for 85% and 75% LTV. A 95% mortgage is more common with residential mortgages, where the borrower will live in the property as their primary residence.
What is the minimum deposit?
- The minimum deposit for a buy-to-let differs from lender to lender and could be as low as 5% of the property value for some lenders. As a rule of thumb, the average tends to be around 75%, although you would need to check with the lender directly.
- For Molo BTL applications, the minimum deposit required is 20% for standard buy-to-lets, and 25% for the new builds, and ex-local authority.
What is the maximum buy-to-let LTV?
- Again, the maximum LTV for a buy-to-let differs from lender to lender and could be as high as 95% for some mortgage providers.
For Molo BTL applications, we consider up to 80% LTV applications and would require you to evidence the remaining 20% (showing us how you will fund 20% of the property’s value).
What is buy-to-let yield?
Buy-to-let yield refers to the return on investment generated by a buy-to-let property. It’s calculated by dividing the annual rental income by the total investment in the property, including the purchase price and any associated costs such as legal fees, stamp duty and renovation costs. The resulting figure is expressed as a percentage, representing the yield on the investment.
For instance, if a buy-to-let property generates £12,000 per year in rental income, and the total investment in the property was £200,000, the buy-to-let yield would be 6% (£12,000 divided by £200,000).
The yield is an essential factor to consider when investing in a rental property, as it helps investors determine whether the property is likely to generate a good return on investment. A higher yield indicates a more profitable investment, although you should balance the yield against other factors, such as the potential for capital growth and rental demand.
Most lenders will allow you to apply for a buy-to-let mortgage either directly or via an intermediary (broker)
- An intermediary (broker) searches the market on your behalf and offers their advice and guidance on how you should proceed, submitting the application on your behalf once you’ve decided on a mortgage product.
- If you choose to do so, most lenders will allow you to apply directly either via their website, a phone call or a visit to their branch. You can compare lenders online using search comparison websites, such as GoCompare and Money Supermarket.
If you’re working with an intermediary, they will apply for a mortgage in principle on your behalf. If you are applying directly, you’ll follow the process of your chosen mortgage lender: some lenders opt for a telephone application process, others offer an in-person journey (often appointment based), and some lenders allow you to apply for a mortgage in principle online.
Whether or not a mortgage in principle will impact your credit score may depend on the lender that has provided you with one.
In most cases, however, a lender performs a soft check on your credit report, meaning it doesn’t show up to other lenders and won’t impact your credit score.
If a lender does carry out a “hard search” on your credit profile, this will impact your score and the search will be visible on your credit profile. It’s best to check if the lender performs a hard or soft search for a mortgage in principle before applying. At Molo, we only perform a soft search for the mortgage in principle.
In short, no. A mortgage in principle doesn’t guarantee that you’ll be granted a mortgage. Most lenders will offer two formal signs of approval in the mortgage process: a mortgage in principle and a formal mortgage offer.
The mortgage in principle is often based on a brief overview of the application. Whereas, a formal mortgage offer is carried out using a high level and detailed underwriting process.
Learn more about mortgage in principle: Link to articles about this topic.
Yes, you can apply for a buy-to-let mortgage as a self-employed individual. However, the application process may be slightly different than if you were employed by a company.
When applying for a buy-to-let mortgage as a self-employed individual, you will typically need to provide more detailed financial information than if you were employed by a company. This may include providing tax returns, bank statements and other financial documents to demonstrate your income and ability to repay the mortgage.
It’s important to note that lenders may have different requirements for self-employed borrowers, and the criteria can vary depending on the lender. Some lenders may require a minimum amount of self-employment history or a certain level of income, while others can be more flexible. Therefore it’s good to shop around and compare different lenders to find one that meets your specific needs as a self-employed individual.
There are lenders, such as ourselves, that don’t have a minimum income requirement and most will actually use rental income as a form of income, especially as professional landlords only have rental income. Every lender must make sure rental voids can be covered, but this can come from income, rental or potentially any savings they have
Each lender has slightly different document requirements for a buy-to-let application. There are some documents that would be considered “industry standard” such as payslips and P60s to evidence earned income and bank statements to evidence expenditure over a certain period.
Typical documents needed for a buy-to-let mortgage
- Proof of identity, such as a passport or driving licence
- Proof of address: Utility bills, bank statement or council tax bill
- Evidence of income: Payslips if you are employed, or tax returns and accounts if you are self-employed
- Bank statements: You may need to provide bank statements for the last three to six months to show your income and spending habits
- Proof of deposit: You’ll be required to provide evidence of the deposit, such as bank statements or proof of sale of another property.
- Property details: Details of the property you are purchasing, including the address, purchase price and estimated rental income.
Download Molo guide if you are applying for a buy to let mortgage with Molo : Molo Packaging Guidelines
Buy-to-let stamp duty
Stamp duty isn’t part of the buy-to-let mortgage process, but it is an additional cost you’ll likely need to factor in when working out how much deposit you have available.
Stamp duty is a tax payable on the purchase of property in the UK. For buy-to-let properties, the stamp duty rules are slightly different than for owner-occupied properties, with landlords needing to pay an additional 3% surcharge on the property. Properties purchased as a primary residence avoid any surcharges.
Stamp Duty Land Tax (SDLT) is the charge you’ll need to pay for acquiring a property. There are exemptions to this and they are as follows.
- The property is left to you in a will
- The property is transferred to one party due to a divorce or a separation
- The property is given to one party as a gift or transferred with no money being exchanged
- The property is valued over £125,000 but is purchased for less than this
- The property is a holiday lodge or houseboat.
Currently the amount you will need to pay for stamp duty on buy-to-let properties (if applicable) is determined by the value of the property and is set as follows:
Value of Property
Percentage fee paid for stamp duty
Up to £125,000
£125,001 to £250,000
£250,001 to £925,000
£925,001 to £1,500,000
If, for example, you want to purchase a property for £200,000, then you’ll need to pay £10,000 in stamp duty on this property. It will need to be paid to the conveyancers or solicitors within 14 days of completing on the property unless the conveyancer requires it earlier.
You may want to know if there is an option to claim back stamp duty on buy-to-let properties. There are scenarios where this could happen, as outlined below:
- Second Home stamp duty (surcharge) refund if you sell your main residence within three years – where properties were sold on or after the 29th October 2018 the refund request needs to be with HMRC within 12 months of the property being sold.
- You may be able to apply for a refund of stamp duty land tax for properties with a self-contained annexe, granny flat or another property that is smaller than your main residence.
- A miscalculation in the value of your property.
It’s best to check with the HMRC or your accountant to see if you would qualify for a refund of stamp duty land tax payments or surcharges as it is not also eligible.
Yes, limited companies pay stamp duty on buy-to-let properties. The stamp duty rates for limited companies purchasing buy-to-let properties are the same as for individuals purchasing buy-to-let properties.
If you’re purchasing a buy-to-let property in the name of a limited company, there is a 3% surcharge that will be added to the stamp duty. It’s good to take this surcharge into account, as it is separate from the purchase price of the property.
If you own a buy-to-let property in your individual name and decide to transfer it to a limited company, you will still need to pay stamp duty on the transfer. This is because the transfer will be seen as a purchase into the limited company, and stamp duty will be applicable.
Stamp duty must be paid within a certain period of time. It’s best to check with a conveyancer when it needs paying to ensure compliance with the latest stamp duty rules and regulations.
In recent years, the buy-to-let market has been impacted by several changes that have made it more challenging for landlords to maintain their properties. For example, the 3% surcharge introduced in 2016 for stamp duty on second homes or buy-to-let properties made it more expensive to buy an investment property.
In addition, the government also reduced the mortgage interest relief that landlords could claim in 2017. This change means that higher and additional rate taxpayers may now pay more tax. While these changes may make it more difficult for some landlords to purchase and maintain buy-to-let properties, buy-to-let investments can still be a worthwhile option depending on factors such as the property’s location, type and condition.
Buy-to-let cost and fee
When looking to purchase or remortgage a buy-to-let, you will need to take into account all the costs associated. These include the initial cost of the property, the letting costs and the running costs.
If you’re looking to get a mortgage on a buy-to-let, then you’ll need to take into consideration the following costs:
- Broker fees if you submit the case using a broker. Most brokers are free, but some charge for their services
- You may need to pay a valuation fee and potentially a re-inspection fee if needed
- Following a valuation, there may be specialist reports required and work being carried out to the property
- You will need to pay a product fee (you can check if this can be added to the overall loan)
- Solicitor fees will also need to be taken into account as the lender will request a solicitor review the offer and make sure everything is okay. Applicants will be charged these fees and also their own solicitor fee if they use a firm not on the lenders panel
- Stamp duty fees will also need to be taken into account for purchases. This is a one-off payment which is additional to the purchase price
- If the property is brought unfurnished, you will also need to take additional costs, such as buying furniture, into account. Alternatively, you can decide to let it unfurnished.
When considering the letting costs, you’ll need to think about the letting agent that you place the property with as agents charge different amounts to try and secure the property. You should also consider the annual fees they charge for looking after the property and general running costs as these can also be different from each letting agent or management company.
There are also general running costs of a buy-to-let property:
- The general wear and tear a property goes through and the maintenance costs
- The service charge and ground rent that is paid if the property is part of a leasehold
- You’ll also need to take into account the mortgage payments and consider rental voids if you don’t have a tenant in place when mortgage payments are due.
Get a mortgage in principle
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- It won’t affect your credit score
- It takes under 2 mins
Managing a buy-to-let property can be a challenging task, but there are several steps you can take to help ensure it runs smoothly. Here are some key things to consider when managing a buy-to-let property:
One of the most important things you can do is select the right tenants for your property. This means conducting thorough tenant screening, including background checks, credit checks and references. A letting agent can do this on your behalf.
It’s important to keep the property well-maintained, both to keep tenants happy and to ensure the property retains its value. This may include regular cleaning, repairs and maintenance, as well as periodic inspections to check for any issues that may need attention.
Have a clear rent collection process in place to ensure that tenants understand their obligations when it comes to paying rent. This may include setting up automatic payments or reminders, and having a plan for dealing with late or missed payments.
As a landlord, you are responsible for complying with a range of legal requirements, such as ensuring that the property meets health and safety regulations and providing tenants with certain information, such as a copy of the tenancy agreement and the government’s “How to Rent” guide.
Maintaining good communication with your tenants can help to avoid misunderstandings and ensure that any issues are dealt with promptly. This may include setting up regular check-ins or providing tenants with a point of contact for any questions or concerns they may have. Alternatively, you can have a management company or letting agent do it on your behalf for a fee.
Get a mortgage in principle
- It’s free
- It won’t affect your credit score
- It takes under 2 mins