For homeowners looking to move up the housing ladder, becoming a property landlord is the next, natural progression.
This guide will give you an overview of Buy to Let Mortgages and how they work.
Please Note: The information presented in this article is for research purposes only and is subject to changing legislation. Please seek independent financial advice if you would like to explore the legalities and taxation of Buy to Let mortgages, in more detail.
A Buy to Let mortgage is taken out on a property you do not wish to live in. These mortgages differ greatly from residential mortgages, because a profit is generated from rent. Therefore, this aspect needs to be factored into the mortgage agreement.
As well as the conventional Business Buy to Let Mortgage deals, there are also Consumer Buy to Let Mortgages. These were introduced in April 2016, and are very much like ‘Let to Buy’ mortgages. This is where you let out your property and your tenants cover your mortgage payments. You can then use the rental income saved to put a deposit on a new home. These are designed for people who are not using Buy to Let for business purposes, they may have fallen into being a landlord by living in a home they are struggling to sell or, for whatever reason, do not wish to sell.
Rental calculations are crucial to this type of mortgage plan, as it will determine the maximum amount you can borrow within a single loan. This top figure for borrowing is typically based on rental income (this could be, for example, 125%). This means that you should charge 25% more than your expected monthly mortgage charge. The interest rate charged on top of that may be around 5%.
Please note: The maximum amount for borrowing is also determined on the amount of deposit you have available at purchase.
You will be responsible for collecting the monthly rent from your tenants and forwarding the funds to make your mortgage payments. Many buy to let mortgages are interest only, however other types such as fixed rate and tracker mortgages are also available. See our Guide to Mortgage Types for more information on how these mortgages are repaid.
This is also known as ‘landlord insurance’ and is essential for all Buy to Let investors. There are three main types;
The money you make from rent will be taxed at your relevant income band. For basic tax rate payers, this is 20%, for higher rate payers this moves up to 40% and for additional rates, this increases to 45%.
It is possible to deduct a number of allowable expenses from your tax bill, your accountant can offer an exact figure, as there are many variants, and further changes are being introduced by 2020. However, as a brief illustration, deductions may include;
This tax is payable on the sale of a buy to let property. If the home has increased in value, capital gains tax may be charged on the value of the increase (minus stamp duty, estate agent and solicitors fees). The maximum allowance, per year, on capital gains without charge is £11,100 and this is separate to personal income tax allowance. The rate of tax charged varies and will be either 18% of the profit or 28% (based on your tax band).
Please note: At the time of writing, from 2019, capital gains tax will need to be paid within one month of property sale completion.
Buy to let homes will be charged an extra 3% on top of their stamp duty band, for every ‘additional’ property purchase over £40,000. This will need to be paid within 30 days of sale completion. A breakdown of the tax bands are as follows;
Please note: Stamp duty is deductible from capital gains tax, payable upon sale completion of a buy to let property.
Inheritance tax applies to buy to let properties and the amount charged varies according to your individual circumstances. An independent financial expert can help you calculate your inheritance tax, but at an overview level, if you are a sole landlord with a combined estate worth more than £325,000, inheritance tax may be payable. If you are married, then this doubles to £650,000. Anything over this figure is taxed at 40%.
Tracy earns £60,000 pa and has been a landlord for 10 years. In 2016, Tracy got news that her taxation costs will be altered considerably and now she is reassessing her buy to let investments.
Previously Tracy made a rental income of £10,000 a year. Her mortgage interest was £9,000, giving her a £1,000 profit. As she is a higher rate tax-payer, she paid 40% tax on her profits (so, £400).
Under the new rules, Tracy’s tax relief will be capped at 20%. This means Tracy will have to pay tax on 40% of the £10,000 rental income, which is £4,000, minus 20% of £9,000 interest (which is £1,800). This will make her new tax bill £1,800.
With joint buy to let properties, all parties must be fully aware of the legal implications and be agreed on their share of the mortgage, as well as their preferred timeframe for the venture.
The process of application is the same as a single buy to let mortgage application, in that your personal and rental income will be assessed carefully, as well as your credit ratings. Where these applications differ is in the split of the shares. As with joint mortgages, ownership can be split in one of two ways;
It is highly recommended that joint buy to let investors make a Declaration of Trust agreement, which is a legal document containing the length of notice either party should give if they wish to exit the mortgage, and details of how the property should be sold on in the future (i.e. who has first refusal of shares if one person wants to sell and how profits from rent should be split).
If you are joining up with another person to purchase a Buy to Let Property, be advised that there are some differences in the taxes charged, as well as provisions that need to made for the income received in rent.
Stamp Duty – In terms of stamp duty, you may be charged an additional 3% on top of conventional stamp duty rates for every property share worth over £40,000. For instance, if you own a 30% share in a buy to let property that costs £275,000, you may be charged 8% of the property’s value as stamp duty.
Capital Gains Tax – When it comes to the sale of a buy to let property, the first £11,100 profits may be exempt from capital gains tax. However, if you are a joint buy to let mortgage holder, this increases to £22,200.
If you are thinking of taking up a property investment using a Buy to Let Mortgage, it is a good idea to speak to an independent mortgage advisor, as they can help you find the best deal for you. Get in touch for a free, no-obligation buy to let mortgage quote.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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