In the past few years, buying a house as a business has become more and more popular. This method, called Buy To Let (BTL) investments, involves buying a house or flat with the goal of renting it out to make rented income. Unlike regular homeownership, BTL properties are not lived in by their owners. Because of this, they are subject to different tax rules, loan requirements, and investment strategies. Since interest rates are still historically low, now is a great time for people who want to become investors to start looking into BTL mortgages. This complete guide will go over everything you need to know to buy a BTL home and get a mortgage to pay for it.
What is a Home Loan for Buy-to-Let?
A BTL mortgage is a type of loan made for people who want to buy a house to rent out instead of living in it themselves. BTL loans are different from regular mortgages because they have features and requirements that meet the needs of renters. For example, BTL buyers usually need bigger down payments and charge higher interest rates because there are more risks with these kinds of deals. Still, because of the way the economy is right now, there are many great deals on homes for smart buyers who want to get ahead in the market.
What Makes Residential and Buy-to-Let Mortgages Different
Residential mortgages and BTL mortgages are very different in terms of who can get them, how much they cost, how they are repaid, and how they affect your taxes. Here is a quick list of each point:
Criteria for Eligibility
Usually, people who want to get a BTL mortgage must either own one or more homes outright or have enough equity in properties they already own. Since the borrower’s monthly income doesn’t come directly from the property, lenders look at their credit history, job status, and affordability checks more closely than they would on a normal application.
Fees
There are extra arrangement fees of between £500 and £2,500 for most buy to let mortgages, but many standard mortgages only have a small administrative fee. Some lenders also want professional appraisals or studies, which adds to the cost of the deal. Nevertheless, these one-time fees should still be less than what it costs to sell or move a main residence.
How to Pay Back
There are two main ways to pay back a BTL mortgage: Interest Only (IO) and Repayment. With Interest Only (IO), monthly payments only cover the interest the bank charges, and with Repayment, monthly payments include both interest and the principal until the end of the term. IO plans usually work best for wealthy people who have other ways to make money, like pensions or savings accounts. Still, first-time landlords who want long-term security tend to like repayment plans.
Effects on taxes
On a self-assessment tax return, landlords must list any rental income they get. When they sell the item, they also have to pay Capital Gains Tax (CGT), stamp tax surcharges, and new rules about the wear and tear allowance that went into effect in April 2016. These fees are different for each person, but they can have a big effect on business margins.
What do I need to do to get a BTL mortgage?
The steps for applying for a BTL mortgage are mostly the same as those for getting a home deal. Here is a short summary of the entry process:
Step 1: Look into different deals
Do a lot of study online and talk to independent mortgage advisors to compare rates and terms from different lenders before you start looking for the perfect BTL mortgage. Compare websites, checklists, and questionnaires to figure out what you want based on things like the starting rate, the length of the mortgage term, penalties for paying off the loan early, flexible payment plans, and so on.
Step 2: Look for a good property.
Once you’ve found a mortgage that works for you, talk to real estate agents or property managers to help you narrow down the houses or apartments that are in your price range. Watch out for places that people want to live in and that have good transport, amenities, and rental yields. Maintenance prices and void periods should also be taken into account.
Step 3: Offer something
When you find a home you love, use a lawyer’s help to make an official offer to the seller. Include proof of funds, ID, and any other paperwork the lender asks for along with the buy agreement. Right now, it might be a good idea to hire an inspector to look over the property carefully and find any problems that could lower its value or make it unsuitable for living in.
Step 4: Fill out the application form
Fill out the mortgage application form that your chosen lender gives you. Include information about yourself, your finances, your job, and how much rent you expect to make. Along with the paperwork you’ve already sent to the seller’s lawyer, you should also send supporting papers like payslips, P60 statements, bank statements, and references.
Step 5: Have to wait for approval
After sending all the necessary paperwork, you will need to wait calmly while the lender looks over your request and decides if they will approve it. If you win, sign the contract, send the money to the agent handling the sale, and you’ll soon be a seasoned landlord!
That being said
Because there are so many factors to consider, buying a BTL home needs a lot of thought. The main things you should remember from our piece are the differences between BTL and residential mortgages, the requirements for eligibility, fees, repayment options, and tax issues, and the structured steps you should take when applying for finance. In this way, you set yourself up to take advantage of good chances and do well as a buy-to-let investor over time. Have fun!