In recent years, investing in residential real estate has grown in popularity. Buying a home or apartment with the goal of renting it out to tenants in order to make rental income is known as buy to let (BTL) investing. Because BTL properties are not occupied by their owners, they are subject to different lending standards, investment techniques, and tax laws than traditional homeownership. As long as interest rates are historically low, now is the perfect time for would-be investors to learn more about BTL mortgages. We will go over every detail of purchasing a BTL property and financing it with a mortgage in this extensive tutorial.
A Buy to Let Mortgage: What Is It?
A BTL mortgage is a particular kind of financing intended for people who wish to buy a home to rent it out instead of occupying it themselves. BTL loans, in contrast to conventional residential mortgages, have particular features and specifications designed to meet the particular demands of landlords. For example, because these kinds of deals include higher risks, buy to let mortgages frequently demand larger deposits and charge higher interest rates. However, considering the state of the economy right now, astute purchasers hoping to advance in the property market have access to a variety of alluring offers.
The Variations between Residential and Buy-to-Let Mortgages
Residential mortgages are not the same as BTL mortgages in terms of qualifying requirements, costs, terms of repayment, and tax ramifications. Below is a quick summary of each point:
Qualifications
Applicants usually need to own one or more homes outright or have enough equity in their current properties in order to be eligible for a BTL mortgage. Since the borrower’s monthly income does not originate from the property itself, lenders also examine the borrower’s credit history, work status, and affordability checks more closely than they do on traditionally submitted applications.
Charges
Many conventional mortgages just require a minimal administrative cost, while the majority of BTL mortgages have additional arrangement fees that range from £500 to £2,500. Certain lenders also want expert surveys or assessments, which raises the cost of the transaction even more. These up-front costs ought to be less than the costs associated with moving or selling a primary house, though.
Methods of Repayment
Repayment mortgages, in which interest and capital payments are combined each month until the end of the term, and Interest Only (IO) mortgages, in which monthly payments cover only the accruing interest paid by the bank, are the two basic ways to service a BTL mortgage. IO schemes are typically more appropriate for wealthy persons who have other sources of income, including savings accounts or pensions. However, initial landlords who are looking for long-term stability typically favour repayment plans.
Tax Repercussions
Any rental income received by landlords must be reported on a self-assessment tax return. When they sell the asset, they also have to pay Capital Gains Tax (CGT), stamp duty surcharges, and the wear and tear allowance adjustments that were made in April 2016. These fees can have a significant impact on profit margins and vary based on certain conditions.
How Can I Apply for a Mortgage with a BTL?
The process of applying for a BTL mortgage is mostly similar to that of acquiring a home loan. A brief summary of the application process is provided below:
Step 1: Examine Various Offers
Prior to starting your quest for the ideal BTL mortgage, thoroughly explore the market online and consult with independent mortgage consultants to compare terms and rates from several lenders. Assess your preferences depending on variables such as the initial rate offered, the length of the mortgage term, early redemption penalties, flexible payment plans, etc. by using comparison websites, checklists, and questionnaires.
Step 2: Locate an Appropriate Property
After selecting an appropriate mortgage option, get guidance from real estate brokers or property managers to create a shortlist of potential homes or apartments that fit your budget. Keep an eye out for popular locations with decent facilities, transportation, and rental yields. Remember to account for void periods and maintenance expenditures.
Step 3: Present Your Offer
Once you’ve located a property you adore, use a solicitor to help you make a formal bid to the vendor. Enclose identification, proof of funds, and any other paperwork the lender requires with the purchase agreement. It could be a good idea to hire a surveyor at this point to go over the property in detail and find any problems that could compromise its habitability or worth.
Step 4: Fill out the application.
Complete the mortgage application form offered by the supplier of your choice, providing personal data, employment history, financial history, and an estimate of your rental income. Provide supporting documentation in addition to the paperwork that has previously been sent to the seller’s conveyancer, such as paystubs, P60 statements, bank statements, and references.
Step 5: Await authorization
Once all required paperwork have been sent, wait patiently as the lender evaluates your request and determines whether to approve it. If everything works out, you can become an experienced landlord by signing the agreement, giving the money to the selling attorney, and so on!
Finally
Because there are so many factors to consider, buying a BTL property needs careful thought. The most important things to remember from our post are that BTL and residential mortgages differ from one another, that you should familiarise yourself with eligibility requirements, costs, repayment alternatives, and tax implications, and that you should apply for financing using an organised method. By doing this, you put yourself in a strong position to take advantage of lucrative possibilities and eventually succeed as a buy-to-let investor. Wishing you luck!