These days, it’s more important than ever to make 100% sure that you have thoroughly understood the numbers behind a buy to let property, particularly when it comes to your mortgage. With this in mind, here is a brief guide to buy to let mortgages.
Buy to let mortgages work differently depending on whether or not you are a limited company
Even though lenders assess potential borrowers on the basis of the rental income they (expect to) receive from the property, in a worst-case scenario; they can make a claim against a private individual’s personal property. They can, however, only claim against the assets of a limited company rather than the property of the people who own the company and have to take this fact into consideration when deciding whether or not to do business with them.
Landlords with more than three mortgaged properties must have their whole portfolio assessed
This regulation comes into force on 30th September 2017, so at the moment, it’s unclear what it’s going to mean in practice.
Deposits still matter
When buying buy-to-let properties for sale, larger deposits mean more protection for lenders and potentially mean a bit more flexibility/breathing space for landlords if circumstances change. As a minimum, landlords should be able to put up 15% of the value of the property, but 25% would be better in the senses of opening up more options.
Mortgage income is assessed against a theoretical interest rate
The rule of thumb is that your rental income has to cover your 125% of your mortgage payments at an interest rate of 5%-6%. When looking at your rental income, lenders will also check your plans for paying other costs such as maintenance and service charges and agent fees.
Interest only is a viable option in the buy-to-let sector
Interest-only mortgages have largely disappeared from the residential mortgage sector, but they are still very much a feature of the buy-to-let mortgage market. Interest-only mortgages are generally more affordable but you never actually build up equity in the property, essentially you are renting the property off the bank and sub-letting it to tenants, but you have all the responsibilities of a home owner. Since mortgages are fixed-term loans you will either have to remortgage before the term runs out or sell the property to repay it (since you have no equity). This means that you take the risk that you may have to sell into a slow market, but it also means that you benefit from rises in house prices. Basically, the longer you intend to hold the property, the less you are at risk from short-term fluctuations in the market and the more you can benefit from the long-term upward trend of house prices. If, however, you intend to hold the property indefinitely, then you may be better to use a repayment mortgage, so that you ultimately end up owning it outright.
Remember to stay aware of the tax situation
While the 3% stamp duty surcharge may be annoying to landlords, its impact is, at least, easy to calculate, which is more than can be said for the changes to mortgage tax relief. You may wish to look at having a professional accountant handle your finances and keep you updated on any changes to the tax regime which may impact your investment