8 most frequently asked buy-to-let mortgage questions

1. What is a buy-to-let mortgage?

A buy-to-let mortgage is a type specifically designed for landlords who buy a property to rent out. It typically requires a larger deposit than a standard residential mortgage, and the interest rates are usually higher.

Key Features:

• Larger Deposit: Buy-to-let mortgages typically require a bigger deposit than standard residential mortgages. This is because lenders consider them to be a higher risk. Expect to need at least 25% of the property’s value, but it could be as high as 40% in some cases.  
• Higher Interest Rates: The interest rates on buy-to-let mortgages are usually higher than those for owner-occupier mortgages. This reflects the increased risk for the lender.  
• Interest-Only Payments: Many buy-to-let mortgages are interest-only, meaning you only pay the interest each month, not the actual loan amount. This can make monthly payments more affordable, but you’ll need to repay the full loan at the end of the term.  
• Rental Income Assessment: Lenders will assess the potential rental income of the property to determine how much you can borrow. They need to be confident that the rent will cover the mortgage repayments, usually with a buffer (e.g., 125% of the monthly payment).

2. How much deposit do I need for a buy-to-let mortgage?

The minimum deposit for a buy-to-let mortgage is usually 25% of the purchase price, but it can sometimes be as high as 40%. The exact amount will depend on the lender and your individual circumstances.

3. What are the interest rates like for buy-to-let mortgages?

Interest rates for buy-to-let mortgages are typically higher than those for standard residential mortgages. Lenders consider them to be more risky.

4. How much can I borrow with a buy-to-let mortgage?

The amount you can borrow will depend on a number of factors, including your income, credit score, and the rental income you expect to receive from the property. Lenders will typically want to see that the rental income will cover at least 125% of the mortgage repayments.

5. What are the fees involved with a buy-to-let mortgage?

There are a number of fees involved with taking out a buy-to-let mortgage, including arrangement fees, valuation fees, and legal fees. These fees can vary depending on the lender, so it’s important to shop around and compare deals.

Buy-to-let mortgages come with a range of fees, which can vary depending on the lender and the specific mortgage product. Here are some of the most common fees you might encounter:  

Arrangement Fees:

• Purpose: This fee covers the administrative costs associated with setting up your mortgage.
• Amount: Can range from a few hundred pounds to several thousand, sometimes calculated as a percentage of the loan amount.
• Payment: Often payable upfront or added to the loan.   

Valuation Fees:

• Purpose: The lender needs to assess the value of the property you’re buying to ensure it’s worth the loan amount.   
• Amount: Varies depending on the property size and value, typically a few hundred pounds.
• Payment: Usually payable upfront.

Legal Fees:

• Purpose: You’ll need a solicitor to handle the legal aspects of the mortgage, including conveyancing (transfer of ownership).   
• Amount: Can vary significantly, often a few hundred to over a thousand pounds.
• Payment: Payable at various stages of the process.

Broker Fees:

• Purpose: If you use a mortgage broker, they may charge a fee for their services in finding you a suitable mortgage.   
• Amount: Can be a flat fee or a percentage of the loan amount.
• Payment: Varies depending on the broker.

6. What are the tax implications of owning a buy-to-let property?

There are a number of tax implications to consider when owning a buy-to-let property, including income tax on rental income and capital gains tax when you sell the property. It’s important to seek professional advice to understand the tax implications in your individual circumstances.

7. What are my responsibilities as a landlord?

As a landlord, you have several legal responsibilities, including ensuring the property is safe and habitable for tenants and complying with tenancy deposit protection rules. It’s important to understand your responsibilities before you become a landlord.

8. What happens if my tenant doesn’t pay their rent?

If your tenant doesn’t pay their rent, you’ll need to take steps to evict them. This can be a complex and time-consuming process, so seeking professional advice is important.

1. Income Tax:

• Rental Income: Any rental income you receive is considered taxable income and needs to be declared on your Self Assessment tax return. This includes rent payments, but also any other income derived from the property, such as fees for services or any surplus from a returned deposit.  
• Tax Bands: Your rental profits will be taxed at the same rates as your other income, meaning you’ll pay 20%, 40%, or 45% depending on your income tax band. It’s important to be aware that rental income can push you into a higher tax bracket.  
• Allowable Expenses: You can deduct certain allowable expenses from your rental income before calculating your tax liability. These include:
  • Mortgage interest (though this is now restricted to the basic rate of tax relief)
  • Property maintenance and repairs (but not improvements)  
  • Letting agent fees  
  • Insurance costs (buildings and contents)  
  • Council tax (if paid by you)  
  • Other direct costs, like advertising for tenants  

2. Capital Gains Tax (CGT):

• Profit on Sale: When you sell your buy-to-let property, you’ll likely have to pay Capital Gains Tax on any profit you make. This is the difference between the selling price and the purchase price, minus any allowable costs (like property improvements).  
• CGT Rates: The CGT rates for residential property are 18% for basic rate taxpayers and 28% for higher rate taxpayers.
• Annual Allowance: You have an annual CGT allowance (£12,300 for 2023/24) that can be used to offset your capital gains.

3. Stamp Duty Land Tax (SDLT):

• Purchase Tax: You’ll need to pay Stamp Duty Land Tax when you purchase a buy-to-let property.  
• Higher Rates: Buy-to-let properties are subject to a higher rate of SDLT compared to owner-occupier purchases. This is currently 3% above the standard rates.

4. Other Potential Taxes:

• Inheritance Tax (IHT): If your total estate, including your buy-to-let property, exceeds the inheritance tax threshold (£325,000 for individuals, £650,000 for couples), your beneficiaries may have to pay inheritance tax on the value of the property.