• Chris Warner

Buy to let mortgages

Buy to let mortgages are now very mainstream when compared to years ago. They offer anyone the ability to purchase a property with the intention of letting it out on a short-term basis (6 – 12 months). The rules around buy to let mortgages are largely similar to a conventional residential mortgage with a few key differences:

  • Fees charged by the lenders tend to be higher than a residential mortgage application

  • Interest rates also tend to be higher due to the increased risk

  • Minimum deposits required are typically 25% but they can range between 20-40%

  • Interest only is the preferred method of repayment for most buy to let landlords, this means they will only be paying off the interest every month with the original mortgage amount or capital remaining the same throughout the term of the mortgage.

Most buy to let mortgages are unregulated by the Financial Conduct Authority (FCA). There are a few exceptions to this, i.e. if you inherited a property that you wish to let out, you have lived in the property at some point in the past or you want to let the property to a close family member. These would all qualify as consumer buy to let mortgages and would be regulated by the FCA. They are also assessed according to stricter affordability rules.

Landlord insurance should always be considered when looking at taking out a new buy to let mortgage to protect you from any potential void periods (where the tenant stops paying rent) or any damages done to the property by tenants and/or accidental damage.

There have been a number of tax changes over the last 5 years when it comes to buy to let mortgages and the investment property landscape. There is currently, at the time of writing, a Stamp Duty penalty of 3% for any second properties or investment properties purchased in addition to any normal Stamp Duty Land Tax liability. Landlords were previously able to write off any interest payments for a mortgage against their profits when assessed for tax. This was changed and came into force in the tax year 2016/2017 and has tapered down every year to the point that in the current tax year 2020/2021 you can no longer receive mortgage interest tax relief and will be restricted to the basic rate of income tax credit at 20%.

Capital Gains Tax will be charged if you sell your buy to let property for a profit. If you are a basic rate taxpayer this will be charged 18% in the current tax year (2020/2021) and 28% if you are a higher or additional rate taxpayer.

You will pay income tax on any income made from your property over the year and this will be calculated using a self-assessment tax return at your level of income tax payable.

Due to the number of changes made, many new buy to let mortgages are taken out in a Limited Company name as you are still able to qualify for the mortgage interest relief, however by proceeding on this basis you will also incur Corporation Tax so you would need to consider carefully what route is best for your individual circumstances and tax banding.

You should always consult a tax expert or qualified accountant before taking on a buy to let mortgage to be sure of the potential liabilities involved. I can assist you with mortgage advice but can’t offer professional tax advice.

Please remember, your property may be repossessed if you do not keep up repayments on your mortgage or any loan secured against it.

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