A buy-to-let (BTL) mortgage is used when someone wants to buy a property and rent it out to someone else. These kinds of products are similar to regular residential mortgages. However, there are some differences, so it’s important to understand how they work.
How do I make money from a BTL property?
In theory, the rent your tenant pays will cover your monthly mortgage payments, and even leave you a bit extra. With some BTL mortgages, you must be able to prove that the potential rental value of the property will be greater than your repayment fees.
As a landlord, however, you will be liable for other charges. For example, letting agent fees, repair and upkeep, and remarketing costs. And it’s always possible that a property will be empty for months on end, or something like the boiler could pack up, which means rental income may vary.
Over the years, you will also make money on the value of the property. Once the BTL mortgage has been repaid, all profits you make from selling the property, or continuing to rent it out, will be yours.
How do repayments work?
Most BTL mortgages work on an interest-only basis. This means you’ll only pay interest on the loan itself, and the capital will not be paid off.
Interest only repayments can be helpful when cashflow gets tight, or unexpected repairs need to be performed.
However, you will need to decide how and when you pay off the remaining capital over the lifetime of the BTL mortgage
Do I need a large deposit for a BTL mortgage?
At present, you’ll need to provide at least a 20-25% deposit to get a BTL mortgage.
As with standard mortgages, the larger your deposit, the better rate you will be able to access. For BTL mortgages, having a deposit of over 40% is generally the threshold for accessing better deals.
Should I form a company to buy a rental property?
This option has been taken up by some enterprising landlords, so they can still claim the rate relief and wear and tear allowance that private individual landlords now cannot.
However, this isn’t a straightforward process, and can incur other costs, such as higher interest rates on the kind of mortgages available to companies.
Our advisors can discuss this approach with you, to see whether it could work for your circumstances.
If I already have a BTL property, is it worth remortgaging?
Yes, and many landlords have benefitted from this since the taxation changes reduces their access to relief. It’s a common way for landlords to raise money to purchase another property, renovate an existing property, or simply gain capital for other reasons.
And often, it’s a great way to get a better deal.
Can I turn my current home into a buy to let?
Yes, and this process is called let-to-buy. You’ll need enough equity in your home to access a let to buy mortgage. And in general, these mortgages are taken out at the same time as you take out a regular mortgage to buy your new property.
When in doubt, get expert advice.