If you’re purchasing a property to rent out rather than to live in yourself, you’ll need to obtain a buy to let (BTL) mortgage. You won’t be able to qualify for a standard mortgage, which are for owner-occupiers and not landlords. In fact, renting a property out with a residential mortgage, and without permission, will breach the terms and conditions of your mortgage and could lead to the cancellation of it and repossession of your home.
Buy to let mortgages differ from residential mortgages in a few key areas. Most are interest-only rather than repayment mortgages, which means your monthly payments will be lower, but you won’t own the property at the end of the term. And the amount of money you can borrow will be assessed in a different way, accounting for not just your personal financial circumstances but how much money you can earn in rent.
The math is more delicate too. You can turn a decent profit by renting out property, charging more in rent than your mortgage, but you’ll also have to account for other costs, including tax on rental income, fees to property management companies, landlord’s insurance, and repairs to the property. Will you be able to keep up with the mortgage payments on your rental property, or properties, if you can’t find a tenant? What about if rental values in your area go down? What if you need to replace the property’s boiler or undertake some other emergency repair, to meet your legal requirement of keeping the property safe and inhabitable for your tenants.
You’ll want familiarize yourself with how buy to let mortgages work and the sums involved before you launch yourself as a landlord. Read on.
How BTL mortgages work
You can obtain buy to let mortgages with fixed, variable, discount, capped, or tracker interest rates, much like residential mortgages. And much like an aspiring owner-occupier, you should compare mortgages, surveying the whole field of lenders, to find the best interest rate.
The difference is that most BTL mortgages will be interest only, meaning your monthly payments will cover just your interest—however it is assessed—and not the principal of the loan. This means you won’t own the property outright at the end of the mortgage term. You’ll have to pay off the principal at that point, which most landlords do by selling the property.
With an interest-only BTL mortgage, it helps to think of your rental property as a time-limited investment and indeed, you’re unlikely to want to be a landlord forever. You might want to time your interest-only BTL mortgage, and your exit from renting, with your retirement. And if property prices have gone up in the area when you sell to repay the mortgage principal, you’ll make an additional profit at this point, giving you a nice cushion for retirement.
You may be able to obtain a repayment BTL mortgage too, at the end of which you’d own the property outright, which would allow you to continue to rent out it out beyond the end of the mortgage (for even more profit) or sell it and pocket the full sale price. However, your monthly repayments will be higher and you’ll have to ensure you can charge enough rent to cover them— and your other expenses as a landlord.
How much can you borrow with a BTL mortgage?
The amount of you can borrow with a standard owner-occupier mortgage depends on the multiplication of your income, while taking into account your outgoings. When assessing you for a BTL mortgage, lenders will account for your financial situation—including your salary and outgoings—but also the amount of money you can make renting the property out.
This means you might be able to borrow more money with a BTL mortgage, or several BTL mortgages for several properties, if you’re building a rental empire, than you would with a residential mortgage.
Getting the math right
When you take out a BTL mortgage, you’ll need to carefully do your sums to ensure the amount your can charge in rent will be enough to offset both your mortgage payments (which will be higher if you’ve opted for a repayment BTL mortgage) and the other costs of renting out a property. In addition to your mortgage payments, you’ll need to pay for landlord’s insurance, and for the maintenance of the property and any repairs that arise, and for the services of estate agents and property management companies.
You’ll also have to pay tax on any profit you make from the property, including income tax on profit made from rental income and capital gains tax on any profit made from selling the property.
You’ll also have to account for other risks of renting out property and worst-case scenarios, including difficult tenants who damage the property or don’t pay rent, large repair bills, or a property that sits empty.
A BTL mortgage and a rental property providing a regular income stream can be a great investment, but make sure you carefully scrutinize the financial, and legal, responsibilities of owning a rental property before taking the plunge.
