What Are Buy To Let Mortgages?
The buy-to-let market in the United Kingdom has been showing a significant buoyancy even with the shortfall of houses and rising property prices in the country. Although there have been certain changes to taxation and legislation, this market is continuing to grow year after year. In fact, it offers investors a very good return on investment on their outlay. Such a growth has prompted a healthy increase in the applications for buy-to-let mortgages. This has prompted more and more investors with varied budget sizes to set a foothold in the letting arena. This article provides an overview of buy-to-let mortgages.
Buy-To-Let Mortgages Come With Higher Deposits Than Residential
Buy-to-let mortgages are quite different in terms compared to residential mortgages. The agreement fees are somewhat higher when it comes to buy-to-let mortgages. On the other hand, the deposit you may have to put down is usually greater than what you will find with a residential mortgage. A typical buy-to-let mortgage has a loan-to-value of 75% which means you require a deposit of 25% of the value of the property you are planning to purchase. If you search the market, you may find mortgages at more favorable payment terms. But these mortgages will require larger deposits such as 30-40% of the purchase value.
Don’t Let Your Property On A Residential Mortgage
If you plan to purchase a property with the intention of letting it out, you surely need a buy-to-let mortgage. You should never take a residential mortgage under such circumstances. The lender will need information on how you plan to let the property as well as your income details. If you take a residential mortgage on a property that you plan to let, it is considered fraudulent activity. It can seriously hamper any chances of future financing as well as see you prosecuted and even imprisoned at times.
It is important to understand the repayment criteria when you are planning to apply for a buy-to-let mortgage. It may entail the monthly rent you are anticipating from the property. The lender will usually look for a rental amount that equals to at least 125% of the interest payment on the loan. In other words, monthly rental income that is at least 25% higher compared to your monthly payment figure. The additional 25% is built into the repayment criteria as a buffer in case of a potential void period when the property is empty. It ensures that you are still able to make any repayment in short spells even the income has dried up.
Don’t Forget The Tax
Whatever income you get from this venture is taxable and should be declared as a part of your annual self-assessment. The tax may depend on the level of your income. Current levels range from 20-45%. Remember that you are able to offset a certain percentage of your income through legitimate and allowable expenses incurred. This ensures that you will pay the correct levels of tax compared to your property business.
The other important factor to consider when purchasing a buy-to-let property is in relation to the property and the tenants you plan to attract to it. If you plan to enter the student letting market, your mortgage should be appropriate for Houses in Multiple Occupation (HMO). This is where you will be letting to three or more individual tenants with shared living space.
The buy-to-let market is continuing to grow with prospects for long-term sustainable growth in the market. If you have plans to enter the buy-to-let mortgage market and obtain a mortgage in this regard, you need to understand the nuances and regulations of the industry before you step into the market. It will help provide a greater foundation from where you can build your property portfolio in the future.
The aforementioned article provides a comprehensive overview of the most important factors to consider when you plan to enter the buy-to-let property market in the United Kingdom. It will help save your time and money in the long run.