The Telegraph has published a guide to the way buy-to-let mortgages work, and how to apply for one. Here’s a summary –
- What’s the Buzz About Property Investment?
- Brits love investing in property.
- Benefits: Regular rental income & growth in the property’s value over time.
- However, it’s not risk-free. There are maintenance costs, insurance, tax, and the chance of periods with no tenants.
- Recent Changes to Consider:
- New tax rules.
- Stamp duty surcharge on extra home purchases.
- Energy efficiency requirements for newly rented properties.
- What is a Buy-to-Let Mortgage?
- A mortgage for a property you plan to rent out, not live in.
- Most are “interest-only”: Monthly payments cover the interest, and the capital is paid at the end.
- These have lower monthly payments, boosting your cash flow. But you need a plan for paying off the capital.
- The Limited Company Route:
- Some people now register as limited companies for buy-to-let, thanks to recent tax changes.
- It might offer tax benefits but research is vital.
- Who Can Get One of These Mortgages?
- Typically, those who already own a home.
- But first-time buyers or first-time landlords can apply.
- Age limits apply, usually between 18 and 75.
- Lenders look at rental income to assess viability. They use a measure called “interest coverage ratio” (ICR).
- Deposits are often at least 25% of the property price.
- Where to Find Buy-to-Let Mortgages:
- Available from high street banks, building societies, and specialist lenders.
- Some require going through a broker.
- Given the complexity, speaking to a broker is recommended.
- Choosing Your Mortgage:
- Decide between interest-only or repayment.
- Consider different rates, like fixed or trackers.
- Be aware of specific criteria set by lenders.
- How to Apply:
- Directly or via a broker.
- Brokers can guide through the process and ensure you understand what you’re getting into.
- The Tax Side of Things:
- Stamp Duty: Tax on the initial purchase, with a surcharge for second homes.
- Capital Gains Tax: Tax on profit from selling the property. Some costs can be deducted, and there’s a tax-free allowance.
- Income Tax: Tax on rental income, determined by your income tax band. Earnings below £1,000 aren’t reported, but above that, you must register for self-assessment.
- Mortgage Interest Relief Changes:
- This relief has decreased, but a new “tax credit” has been introduced.
- Holding property in a limited company might be tax-efficient for some.
In a nutshell: Buy-to-let can be profitable, but it’s essential to be informed, consider tax implications, and seek expert advice when needed.