A buy-to-let mortgage allows you to buy or refinance a property you intend to rent out to residential tenants.
What is a buy-to-let mortgage?
A buy-to-let mortgage allows you to purchase or refinance a property that you let to tenants.
These mortgages are designed for residential properties. If you are looking to let a property to business tenants, you will require a commercial mortgage.
You can either take out a buy-to-let mortgage as an individual or through a limited company.
Below we discuss in further detail how buy-to-let mortgages work and the pros and cons of taking out a buy-to-let mortgage.
Thoughts from Matt
“There have been many tax changes over the past few years that have made becoming a landlord less profitable. Nevertheless, owning an investment property is still highly desired by many investors in the UK.
Whether you dream of building a property empire, or simply want to own one or two investment properties, a buy-to-let mortgage can get you on your way.”
Founder and CEO, Funding Guru
How does a buy-to-let mortgage work?
A buy-to-let mortgage allows you to borrow money to purchase a property you intend to let out to tenants, and not occupy yourself.
Or you can take out a buy-to-let mortgage to refinance an existing property – perhaps where you are currently living but plan to move out from and rent it to tenants. You may also look to refinance an existing BTL property and release equity for renovations or to increase your portfolio.
Buy-to-let mortgages can be capital repayment or interest-only. Many landlords chose the interest-only option meaning they only pay interest on the loan and not the capital amount. The benefit of this is lower monthly repayments, meaning more cash is available for income or can be set aside to cover general maintenance and repairs.
The rent you receive should be higher than the mortgage repayments, so you are making a regular cash profit.
You pay off the mortgage by either selling the property in the future, refinancing to another lender, or paying off the loan in cash.
You can either take out a buy-to-let mortgage as an individual, or through a limited company. This means the mortgage will not be in your own name, but in the name of your business.
How much can I borrow through a buy-to-let mortgage?
The amount you can borrow will be linked to the value of the property, the rental income you expect to receive or are already receiving, as well as the size of your deposit.
Lenders will require a deposit of at least 25% but likely more.
They will also typically require the rental income to be at least 30% higher than your mortgage payment. If you do not meet this criteria, you would need to put down a higher deposit to reduce your monthly repayments.
This table shows how much you could borrow through a buy-to-let mortgage based on different scenarios.
Monthly rental income
Total you could borrow
What is required when applying for a buy-to-let mortgage?
Lenders will want to see your:
How is buy-to-let property taxed?
Below we talk through the different tax liabilities that come with being a property investor.
If you are a private landlord, the income you receive from rent should be declared through self-assessment each year. The total rent payments are taxable. So if you are a basic-rate or higher-rate taxpayer, you would pay 20%, 40% or 45% tax on the amount collected through rent (Scotland has different income tax brackets).
Landlords can no longer deduct mortgage interest from the rental income to reduce their tax bill.
If you own buy-to-let properties through a limited company, corporation tax of 19% will be charged on rental income (rising to 25% from April 2023 for companies with annual profit of more than £250,000). When withdrawing the rental income, you also face tax charges whether you pay yourself through a salary or dividends.
Unlike private landlords, you can deduct mortgage interest from the taxable income as loan interest payments are considered a business expense and should not be subject to corporation tax.
When you sell an investment property, you may have to pay capital gains tax on profit made on the initial purchase price.
Capital gains tax is 28% for higher-rate taxpayers, or 18% for basic-rate taxpayers. But there is currently an allowance of £12,300 per taxpayer each year, so if your profit is below this you will not have to worry about capital gains tax. If there is a spouse or partner also on the property deeds, you effectively get double the allowance.
However, be aware that from April 2023, the annual capital gains tax allowance will drop to £6,000 per individual, and to £3,000 per individual in April 2024.
The above only applies if you own an investment property as an individual. If owning through a limited company, you do not pay capital gains tax and also do not benefit from the annual allowance. Instead, corporation tax is charged.
An additional 3% stamp duty rate is applied to any individual or company buying a second home or investment property in England and Northern Ireland. In Scotland and Wales, the surcharge is 4%.
The below table shows the main tax differences between taking on a buy-to-let property as an individual or a limited company.
Tax on income
Charged at personal income tax rate (up to 45%)
Corporation tax (19%), plus income tax or dividend tax when withdrawing income
Capital gains tax
Capital gains tax of 18% or 28% depending on personal income tax rate
Capital gains tax does not apply – instead you pay corporation tax
Mortgage interest relief
Not permitted (but landlords receive a tax credit of 20% of their mortgage interest payments)
Fully deductible as a business expense
3% or 4% surcharge
3% or 4% surcharge
Is buy-to-let right for me?
Buy-to-let mortgages are aimed at landlords renting to tenants in residential properties.
If you are looking to let to business tenants or the property is to be used for your business premises, you’ll need a commercial mortgage.
Alternatively, you may benefit from a bridging loan if you are looking for a short-term loan to help you buy a property quickly. At Funding Guru, we have many different loan options so talk to us today on 0333 006 9141 or by filling in our contact form. One of our dedicated advisers will get back to you as soon as possible.
Got any more questions? Contact one of the team at Funding Guru today.