Buy
To Let
The phrase
buy-to-let
can refer
either to
the
investment
strategy of
buying a
residential
property to
be let for
profit; or
to a
particular
category of
mortgage
used to
purchase a
property for
letting.
Buy-to-let
mortgages
have been on
offer in the
UK since the
late
nineties;
they are
specifically
designed for
investors to
borrow money
to purchase
property in
the private
rented
sector in
order to let
it out to
tenants.
Lenders take
different
approaches.
The amount
of money
investors
can borrow
is
determined
by the
rental
valuation of
the
property.
Usually the
annual
rental
income has
to cover a
certain
percentage
of the
mortgage
repayments,
somewhere
between 120%
and 150%.
This is to
allow
surplus rent
to cover
other costs
such as
property
maintenance
and void
periods
(periods
when there
are no
tenants
living in
the property
and
therefore no
rental
income).
Other
lenders will
offer a
three times'
salary
multiple and
half the
rental
income.
Others base
the amount
that they
will lend on
your salary
and the
existing
loan
commitments
that you
have, but
then apply
the
'deduction
rule'. This
means that
they will
lend up to
3.5 times
your income
(or whatever
salary
multiple
applies),
minus a
representative
figure for
annual
mortgage
payments
worked out
at a pre-set
level of
interest.
Say you earn
£40,000 and
have an
outstanding
mortgage
balance on
your
property of
£120,000.
Under the
rule, the
annual
mortgage
repayments
may be
calculated
as £10,000.
This would
be deducted
from your
salary to
leave
£30,000,
which is
then
multiplied
by 3.5 to
give
£105,000 -
the amount
that you are
able to
borrow.
Typically
the interest
rates that
are offered
on BTL
mortgages
are fairly
close to
residential
mortgage
rates but
will on
average be
higher and
typically
charge
higher fees.
This is due
to the
perception
amongst
banks and
other
lending
institutions
that BTL
mortgages
represent a
greater risk
than
residential
owner-occupier
mortgages.
This type of
investment
has become
very popular
in the UK
over the
last five
years or so,
as house
prices have
dramatically
increased.
Another
reason for
their
popularity
is the tax
advantages
that are
available to
UK BTL
investors.
Rental
income is
considered
in the same
way as
salary, and
is therefore
often taxed
at 22% or
even 40%.
However,
landlords
can deduct
costs from
the taxable
portion of
their rental
income, and
these costs
can include
the interest
portion of
their BTL
mortgage
repayments
as well as
maintenance
costs on the
property.
This tax
set-up has
made BTL
investments
more popular
over the
last few
years.
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