Mortgage services- Get the right mortgage for you

If you’re purchasing a property or several properties and your plan is to rent them out, then a buy-to-let mortgage will be right for you.

If you are renting out property, you will not be able to get a standard residential repayment mortgage, you will need to use specialist buy to let mortgages. Buy-to-let mortgages are different to standard residential mortgages and in this blog, well give you help and advice about the key areas of mortgages for landlords.

Why use mortgage brokers?

Finding the right mortgage, isn’t always easy, with so many lenders and different deals available. It is really important when considering mortgage advice, that you use a specialist mortgage broker or mortgage consultant. They will take time to understand your mortgage requirements and be able to look at the wider mortgage market and find you the best mortgage deal.

Its important to have a suitable mortgage for your needs, depending on your future property plans, income and budget. A mortgage adviser will be able to advise you on the maximum loan permitted, total fee payable, lending criteria and borrowing rate.

Mortgage brokers and advisers offer a professional service and use their experience and knowledge of the mortgage market to gain access to the best deals and to offer you professional advice, based on your individual needs.

What is a buy-to-let mortgage?

A buy-to-let mortgage is a mortgage offered specifically to those people who buy property as an investment and rent the property out, rather than getting a standard residential mortgage for somewhere they will live themselves.

Often these types of mortgages are on an interest only basis, meaning your monthly repayments only pay off the interest each month and not the capital borrowed. This makes your monthly payments far less than if you were repaying capital at the same time. When the mortgage term comes to an end, you’ll then to repay the capital balance as a lump sum.

Why do I need a buy-to-let mortgage?

If you take out a standard residential mortgage on a property you are renting out, you will be in breach of your mortgage agreement. If you breach the terms of a mortgage, you are at risk of having the property repossessed. So, purchasing the right mortgage deal that specifically covers renting out the house is crucial.

If you do have a standard mortgage on a rented property, you will need to contact the mortgage lender to get consent to let the property or switch to a buy-to-let mortgage instead.

The advantages of an interest-only buy-to-let mortgage

• Lower montly repayments. If you sell the property at the end of the mortgage term for more than you paid, you can pay off the mortgage and take the profit yourself. Lower payments mean that you could free up money to spend on buying or improving other properties in your portfolio.
• They are specifically designed for the buy-to-let market, so you wont be breaking the rules if you had a normal residential mortgage on the property

The disadvantages of an interest-only buy-to-let mortgage

• When the mortgage term comes to an end, you will still owe 100% of the money you borrowed.
• There is some risk in relying on the property to maintain its value to pay off the mortgage.
• If the property is worth less than you paid at the end of the mortgage term, you will have to pay the difference when you repay the debt.
• You will pay more in interest over the term of the mortgage because you havent been paying off capital to reduce the amount you owe.
• Buy-to-let mortgages are generally more expensive than residential mortgages.
• There may be less choice of buy-to-let mortgages.

How to find the best buy-to-let mortgage rate

Seeking professional mortgage advice from qualified mortgage brokers, an existing lender or a bank or building society is crucial to get the best mortgage interest rates and deal. To use a mortgage broker and get mortgage advice, you may pay a broker fee, however, the money you may save in the long term, may more than cover any fees applicable. A broker will be able to look at a wide variety of mortgage deals on the market for you.

What are the types of buy-to-let mortgages?

The majority of buy-to-let mortgages are interest only. Meaning you only pay the interest back during the mortgage term. There are a number of different options available to you such as fixed and tracker products as well as standard variable rate mortgages - more details of each of these are below:

Fixed rate mortgage

Mortgage lenders will offer fixed interest rates for a set number of years at the start of your mortgage deal. This means the initial rate will stay the same for the discount period offered. This initial rate period varies and could be 2, 3 or 5 years. After this period, your lender will switch you to their standard variable rate mortgage, unless you look for an alternative deal. This gives you some certainty with initial monthly payments for cashflow purposes.

Standard variable rate mortgages (SVR)

Every mortgage lender will have their own standard variable interest rate. Lenders base their rates on the Bank of England’s Base Rate, which is usually reviewed 8 times per year. However, mortgage lenders dont have to base it on the Bank of England Base Rate, they can decide independently when their own mortgage interest rate changes.

First time mortgage customers, will rarely take out a standard variable rate mortgage, as a fixed mortgage is often a better deal. Most landlords will also avoid remaining on a standard variable rate mortgage once, their introductory rate has ended on a fixed rate deal. It is wise to look at the mortgage deals again and remortgage at this point.

Tracker mortgage

A tracker mortgage moves with the Bank of Englands Base Rate, above a certain percentage. So, your mortgage deal may be set at 2% above the base rate and as the base rate goes up or down, so will your mortgage interest rate and your repayments on your mortgage.

Discount interest rate mortgages

These are often offered by lenders, where an introductory offer of a discount period of interest is given. For example, you may be offered a 2% discount on the lenders standard variable rate. This does mean your payments will go up or down as the standard variable rate changes.

Buy-to-Let mortgages for limited companies

Many landlords with multiple properties will buy the property through a limited company as this can be more tax efficient. However, if you have only one rental property, you may still choose to own this privately.

A limited company mortgage is very similar to a private one but with a limited company buy-to-let mortgage, the mortgage will be in the name of a limited company - not your personal name.

Factors that affect your mortgage options

Lenders will need to assess you or your business to ensure you can cover the mortgage repayments.

If you are a private borrower, they will look into the following things before offering you a mortgage:

• Your overall income.
• Potential rental income.
• Deposit amount you have.
• The amount of equity you have in any current property..
• Your credit score.
• How much your buy-to-let mortgage repayments will be.
• Mortgage purchase price amount.
• Property value.
• Your credit history.
• Your age - People as young as 18 years old and some will go as high as 85 years old.
• Borrower status - whether youre a first-time buyer, first-time landlord or experienced landlord.
• Where you live - normally lenders require borrowers to live in the UK.
• Their own lender criteria.
• How many other buy-to-let properties you have, their value and outstanding debt on them.

If you’re looking to purchase a new buy-to-let investment property you will need to fulfil the criteria of a buy-to-let mortgage unless you’ve used equity to buy it outright.

Landlord tax when considering mortgage payments

The tax you pay as a landlord The tax you pay as a landlord is important factor to consider when working out if you can afford a mortgage. There is stamp duty land tax, income tax, capital gains tax and if you are buying property through a limited company, corporation tax to consider, so you must factor this into your financial calculations.

How can dns accountants help?

Here at dns accountants, we help thousands of landlords manage their finances, find the right mortgages, and have a highly experience team that specialise in the buy-to-let market landlord market.

We have a highly experienced tax team that specialise in landlord tax and will advise you on the tax you will pay when buying and selling property and renting out property. We can also advise you on the most tax efficient way to build a profitable property portfolio.

If you need help and advice on buying and renting out property, then contact us today for help and advice by calling our team on 03300 886 686, or email on enquiry@dnsaccountants.co.uk.

About the author

Gary Zouvani
I am a qualified chartered management accountant with over 25 years’ experience working in industry and accountancy practise. Currently DNS group operations director I manage over 50 employees as well as head up our accountancy franchise proposition.