Are you looking to become a landlord? Or wanting to invest your money into property?
As the name suggests, it involves buying a property which you have the intention of renting it out to people rather than buying a property to live in.
Buy-to-let (BTL) mortgages are typically more expensive compared to a residential mortgage and require deposits of 25% to 40%. The rules around buy-to-let mortgages are similar to those around regular mortgages, but there are some key differences.
• The set up fees tend to be much higher.
• Interest rates on buy-to-let mortgages are usually higher.
• The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (although it can vary between 20-40%).
• Most BTL mortgages are interest-only. This means you pay the interest each month, but not the capital amount. At the end of the mortgage term, you repay the original loan in full. BTL mortgages are also available on a repayment basis.
• Most BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (e.g. spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy to let mortgages and are assessed according to the same strict affordability rules as a residential mortgage.
There are risks like any investment. For example:
• if you are considering cancelling or surrendering any existing investments in order to purchase a property to let, there may be cost or tax implications.
• You should seek financial advice before considering these options there could be difficulties with tenants who breach agreements impacting time and legal fees, as well as income periods of rental voids if the property is not tenanted (during redecoration or change of tenants)
• the higher the sum borrowed the more you are at risk of rent not covering your loans or expenses
• investing in a single property can result in a lack of diversity if you do not already have a good spread of existing investments.
When choosing a property to let, your main considerations are different to those you might apply when choosing a house in which to live.
For example, you might not choose to live in an area heavily populated by students, but when looking for rental potential that same area may be exactly what you’re looking for.
Choosing the right property with the right rental yields is important. This is true not just for your income but also because you want the rent to more than cover the cost of your buy-to-let mortgage.
The Association of Residential Letting Agents (http://www.arla.co.uk) produces a booklet giving you tips on what to look out for when choosing a buy to let property. Their site also has guidance and advice.
Plan for times when there’s no rent coming in
Don’t assume your property will always have tenants.
There will almost certainly be ‘voids’ when the property is unoccupied or rent isn’t paid and you’ll need to have a financial ‘cushion’ to meet your mortgage payments.
When you do have rent coming in, use some of it to top up your savings account.
You might also need savings for major repair bills. For example, the boiler might break down, or there might be a blocked drain.
Don’t rely on selling the property to repay the mortgage
Don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage.
If house prices fall, you might not be able to sell for as much as you had hoped.
If this happens, you’ll be left to make up the difference on the mortgage.
Buy-to-let and tax
Stamp Duty
Unless you have never owned a property, Stamp Duty Land Tax (SDLT) for buy to let properties is extra, on top of the current SDLT rate bands.
Capital Gains Tax
If you sell your buy-to-let property for a profit, you may need to pay Capital Gains Tax.
If your gain is higher than the annual threshold, then you will need to pay CGT. Couples who jointly own assets can combine this allowance.
You can reduce your CGT bill by offsetting costs like Stamp Duty, Solicitor and Estate agent fees or losses made on a sale of a buy to let property in a previous tax year by deducting these from any capital gain.
Any gain from the sale of your property, should be declared on your Self Assessment tax return for that tax year and will be included when working out your tax status for the year which push you into a higher bracket.
Income Tax
The income you receive as rent is liable for income tax. This should be declared on your Self Assessment tax return for the tax year it was earned in.
Depending on your income tax band, this might be taxed at 20%, 40% or 45%.
You can offset your rental income against certain allowable expenses, for example, letting agent fees, property maintenance and Council Tax.
The rules around mortgage interest tax relief have changed. This will mean relief for finance costs on residential properties will be restricted to the basic rate of Income Tax.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Previously, you were able to deduct all of this interest on your mortgage from your rental income before tax was paid. This has been removed and replaced by a 20% tax credit for the entire amount.
The buy-to-let market is complex. There are many different mortgages to choose from.
So it’s good to know that, as your adviser, we are on hand to answer your questions.
We will help you with the tricky process of not only getting a mortgage, but getting the right mortgage.
We take pride in offering a personal service that takes into account your individual circumstances.
Your financial situation is unique, so we work hard to understand your goals and aspirations, and make financial recommendations based on a comprehensive and detailed analysis of your needs.
It is important to evaluate the risks and the benefits before putting yourself in the situation of owning a rental property. We are always happy to help with any enquires you may have!
Get in touch with me here, call 01323 436680 or book directly onto my calendar here.
Willow Tree Financial Services are a Financial Adviser firm based in Polegate, East Sussex, UK. We specialise in Financial Planning, Mortgages, Investments & Pension Planning, Protection & Insurance Wills, Trusts & Estate Planning.
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Some Buy to Let Mortgages are not regulated by the Financial Conduct Authority.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Tax treatment varies according to individual circumstances and is subject to change.
