CS Mortgage Adviser and experienced Landlord, Richard Jubb joins Craig on the podcast for the first time to discuss investing in Buy to Let mortgages.
How did you come to invest in the property market yourself?
It was by accident, to be honest. I ended up owning a property and had to decide whether to keep it or sell it. So I started to research property investment and found it fascinating – it inspired me to build a portfolio of properties.
I sold that first home and bought a rental property straight away – it’s gone well ever since. I’m currently doing my second project now which should be ready to rent very soon.
How do I get started in Buy to Let – what deposit will I need?
There are lots of mortgage products out there, each with different criteria, but the minimum deposit is generally 25% of the purchase price.
Below 25% deposit, you have less choice of lenders and borrowing will be more expensive. If you’re a first time landlord, some lenders’ criteria may exclude you from those products.
Is it more difficult for first time Landlords to get a Buy to Let mortgage?
No, lenders are happy to take on first time landlords. But they might ask that you have a minimum income of £25,000, for example, or for you to own your own home.
The details will depend on your specific situation. If you don’t own your own home or have a lower income, there will still be options and a Mortgage Broker can help.
How do lenders gauge affordability?
With a Buy to Let mortgage it’s much more about the rental property than it is about you. What the lender wants to see is that the rent coming in every month is more than adequate to cover the mortgage payment. You might hear it referred to as ‘interest coverage ratio’ or ICRA.
That ratio needs to give you room to afford property maintenance or cover gaps between tenants. It depends on your income tax position, but often lenders want the rent to be at least 125% of the payment, or sometimes 145%.
Should I choose an interest-only or repayment Buy to Let mortgage?
Many landlords choose interest-only mortgages, but it depends on your personal goals and preferences. With most residential mortgages, people want to pay the loan off and own outright. Whereas with Buy to Let, investors often want to make a return on the money, without any aspiration to own the asset in the end.
It’s like buying shares in a company. You’re not saving up to buy the whole company, you’re buying shares to make a return and then sell them.
Interest-only is a good option because you have more flexibility. So, for example, on a £100,000 property, with a £25,000 deposit you could be looking at a mortgage interest-only payment of £150 to £200 a month. With a 25 year repayment mortgage, payments could be £400-500.
If your rental income is only £650 a month there’s not much profit on the rent. With interest-only you are making a better return, and if you’ve got spare money you can overpay within the limits that the lender sets. This gives you much greater flexibility over how you repay the loan – or invest in your next property.
How does stamp duty work for Buy to Let?
If you own your own home and are buying a second property to let, you will incur 3% additional stamp duty. This also applies if you’re buying through a limited company, a Buy to Let business.
Use an online calculator to work out the cost of stamp duty on different property values, and include this 3% extra. It’s a little complicated as the thresholds and rules are changing frequently, so check the details carefully.
What are the benefits of setting up a limited company for Buy to Let?
This is a hot topic, because the government changed the Buy to Let rules in 2016. Before this point you could declare certain things as the costs of renting out a property, such as maintenance, and mortgage interest was included in these costs.
In 2016 this changed, so if you buy a property in your own name today, you can’t declare mortgage interest as a cost. This means your profit looks higher, and for some people moves them from being a basic rate taxpayer to a higher rate taxpayer – so instead of paying 25% tax on the rental income, you pay 40%.
If you set up a limited company and buy the properties through the company, mortgage interest can still be declared as a cost of doing business. So if you’re a higher rate taxpayer, it is worth serious consideration, especially if you’re looking to build a property portfolio.
There are various pros and cons to this, so it’s important to start this conversation off with a Mortgage Broker and potentially seek professional tax advice.
Is it important to talk to a Buy to Let specialist broker?
It’s worth asking your Mortgage Broker how much of their businesses is Buy to Let, because it is very different to the typical residential mortgage.
It’s important to do your research and be clear about your end goal. Are you building your pension pot? Or wanting to generate some passive income?
Once you’ve got a goal in mind it directs your whole approach. A specialist Buy to Let Mortgage Broker can then take over the mortgage process to make sure you get a suitable deal and that you have explored all the options.