Here’s a wee guest blog about buy to let mortgages by our friend Chris Norton, Mortgage and Protection Adviser at Mortgage Advice Bureau
Property is becoming an increasingly attractive investment opportunity for many people. With record low interest rates and some of the best mortgage deals we have ever seen, you can see the appeal. So, how do you work out if a Buy to let (BTL) is worth the investment?
When considering a BTL investment the mortgage is one of the most important factors to consider so firstly, are you eligible? Most lenders require you to be at least 25 years old and have an annual income of at least £25,000.
Interest Only V Repayment
The number of lenders offering BTL mortgage products may have reduced over the past few years, but there are still many out there offering some great deals.
With an interest-only mortgage, you would keep more of the monthly income but never pay off the loan; with a repayment mortgage you will own the property outright at the end of the mortgage term.
It is more common for BTL mortgages to be interest only, particularly if the investment is to work as a revenue stream. Landlords also tend to hold onto the property for a long period of time, on average 15-20 years during which time the market will change. However, remember the market will naturally go up and down, the same as interest rates, so although they may be low right now, could you afford payments if they were to rise?
Deposits for BTL are on the whole higher than for a standard residential property, with at least 25%. A higher deposit will provide access to more products and incentives. However, depending on the property price, location and rental income it could be possible to get a BTL with a deposit as little as 15%. Interest rates are also generally higher than a standard residential mortgage.
Typically, lenders look for a rental income of at least 125% of your mortgage amount, they do not just take into account your personal income. For example, if your annual mortgage interest payments are £15,000, your rental income should be at least £18,750.
The first thing to know is that you can off-set your mortgage interest against tax, claimed at your personal tax rate. But, if you are a higher rate tax payer, this is being set to a 20% flat rate from April 2017.
What many people buying a second property in Scotland are unaware of is the Land & Building Transaction Tax (LBTT) which came into force in Scotland in April 2015. For every second home over £40k you will pay an additional dwelling supplement of 3% of the total purchase price.
Finally, remember to do your calculations and consider what will happen if the property is empty, annual repairs and maintenance costs. Buying a flat? Don’t forget the common charges for communal repairs and annual factoring fees.
For more information on buy to let mortgages or to discuss your personal circumstances please contact Chris by clicking here.