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A buy-to-let mortgage is usually offered as an interest-only product. This means that a lender will need to undertake an Interest Cover Ratio (ICR) test. A lender wants to know if the rental income will cover the mortgage payment, plus another amount to cover other costs. This test will look at your property’s rental income, to see if it covers 125-145% of the loan repayments.
The ICR is a percentage of the predicted monthly rental income, about the monthly interest payment. It also considers possible future interest rate increases, using a "notional" interest rate of between 5% to 8% (or sometimes higher). Lenders want to ensure you are more than comfortable paying the mortgage payments.
Rental yield is the return you make on your let property. Landlords use rental yield to monitor the value of their property investments and portfolios. To calculate rental yield, you look at the annual rental income from the property as a percentage of the purchase price of the property or a current market value.
For example, if your let property gives you an annual rental income of £9,000 and the purchase price/current value is £200,000 your rental yield would be 4.5%. This gives you what’s called ‘gross’ yield but don’t forget you also need to take into account any other costs you may have such as insurance, mortgage payments or maintenance to give you a ‘net’ yield
Lenders will also require a minimum deposit amount, which ranges from 20% to 40% of the property's value. Typically, this range varies between lenders, a buyer's financial circumstances, and the proposed rental income projections.
Even more so than with a regular mortgage, a strong financial profile is vital when applying for a buy-to-let mortgage.
A lender will analyse your:
The requirements for a buy-to-let mortgage are very strict:
Unexpected property expenses can pop up all the time. A solution? Having a contingency fund. This allows you to cover repairs or periods of vacancy. This buffer shows a lender you can cover these costs alongside mortgage payments during challenging times.
Tax implications are something you need to also consider. Capital Gains Tax on buy-to-let second properties is 18%. However, for higher-rate taxpayers, it’s 28%. Whereas the amount of income tax due will depend on your tax bracket.
Mortgage interest tax relief comes in the form of a tax credit. This is based on 20% of the interest on your loan payments.
Ensure you take into account how much tax you are going to have to pay when calculating your rental potential profits.
Legal matters when renting is another important consideration. We recommend having a bulletproof tenancy contract to help mitigate the chances of running into legal trouble. A lawyer can help you draft one.
In addition, be aware of your responsibilities as a landlord. This includes upkeep of the property, and its appliances, as well as listening to your tenants’ concerns.
Renting can be complicated. That’s why we highly recommend seeking professional legal and financial advice.
Following these tips will help ensure you have a successful buy-to-let property investment!
In conclusion, opting for a buy-to-let investment property is a great idea. It does come with the requirement for lots of research, planning, saving, and sacrifice. It’s vital to consider everything including legal, tax, and financial aspects.
If you are ready to take the next steps in securing your buy-to-let mortgage, get in touch today to speak to an adviser.
Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.