Go paper-free
Amend paper-free preferences for your statements and communications.
What is a Buy to let mortgage?
A Buy to let mortgage is for people looking to buy a property to rent out rather than live in.
How does a Buy to let mortgage work?
Most Buy to let mortgages are interest only. This means your monthly repayments are only paying the interest on what you’ve borrowed. The amount you’ve borrowed doesn’t go down.
Interest rates on this type of mortgage can be:
- Fixed – The rate of the interest and your repayments stay the same.
- Variable – The rate of interest can change, so repayments go up or down.
How much could I borrow?
How much you can borrow for a buy to let property will depend on how much rent you expect to get, rather than how much you earn. The rent usually needs to equal at least 125% of the annual mortgage payments.
You can hold a maximum of five mortgages or borrow up to £3 million across the Lloyds Banking Group. The Group includes, Lloyds Bank, Halifax, Bank of Scotland, Birmingham Midshires, Scottish Widows Bank, Intelligent Finance and The Mortgage Business (TMB).
The maximum loan size on a single buy to let property is £1 million.
How to apply for a Buy to let mortgage
1. Check your eligibility
For example you’ll need to be over 21 years old and be under 80 when the mortgage term ends.
2. Find out how much you could borrow
You’ll usually need a bigger deposit than for a residential mortgage – likely at least 25% of the house value.
3. Start looking for a property
You can do this once you have an AIP. The value of the property must be £50,000 or more to qualify for a Buy to let mortgage.
4. Start your mortgage application
You can do this when you’ve had an offer accepted on a property. This can be done over the phone or in branch. You’ll need your address details for the last three years. Along with your employment and income details for the last 18 months and any outstanding financial commitments.
You’re not allowed to have more than 10 Buy to let mortgaged properties in total across multiple lenders.
How much tax do I have to pay?
Income Tax
You’ll have to declare rental income on your tax return. Keep a record of rental payments received and anything you’ve bought for the rental property. Finance costs won’t be tax deductible, but tax relief can be claimed at the basic rate.
We can't offer tax advice. You should get an accountant to check everything over with HMRC.
Capital gains tax
If and when you decide to sell your buy to let property, you’ll need to pay capital gains tax on the proceeds from the sale. Calculating this tax liability can be quite complicated. It’s worth getting the expert advice of a qualified accountant.
Visit the HM Revenue & Customs website for further information on taxation and allowances.
Pros and cons of a Buy to let mortgage
Pros
- Generate income which could cover mortgage repayments – depending on how much rent you charge and the cost of your monthly repayments, you could find that the property pays for itself, or you make some extra income.
- Long-term investment and gain – there’s no guarantee, but you may see the value of your property increase over time.
- Offset the costs against tax – you can usually claim back some of the costs of running your rental property on your self-assessment tax return.
Cons
- Stamp Duty – landlords may have to pay an additional 3% fee to HMRC.
- The costs of running an empty property – if your property is empty, you’ll still have to pay council tax, mortgage and maintenance costs.
- Damage to the property – you’ll have to cover any damage or repairs, so it’s worth getting specialist landlord insurance.
Let’s take a closer look
-
In England and Northern Ireland, you’ll pay a 3% surcharge on the standard Stamp Duty rate on any buy to let property worth over £40,000. Check out the latest Government guidelines for the Stamp Duty rates.
When you purchase a buy to let property in Scotland, you'll be charged an extra 6% on top of the standard LBTT rates.
If you buy a buy to let property in Wales, you'll need to pay an LTT surcharge of 4% on the normal residential rates.
-
You’ll need to show all the usual evidence about your earnings and your finances, including:
- Deposit.
- Credit history and salary.
- Any debts.
- How much you’ll make from rent.
You might also need the following documents:
- ID – such as a driving licence or passport.
- Gas, water or electric bills.
- Proof of an existing mortgage statement.
- Proof of any other income.
- P60 form.
- Payslips for the last three months, or proof of income and tax returns if you’re self-employed.
- Bank statements for the last three to six months.
- Proof of your monthly outgoings.
- Details of the property you want to buy.
-
When your mortgage term ends, you’ll need to pay the remaining balance in full. To pay the balance when it’s due, you’ll need to plan ahead. This is because to get a Buy to let mortgage, you’ll need to show your lender how you’ll pay off the final balance.
You might also like
