Your guide to insurance for mortgages
Most mortgage lenders will require you to simultaneously take out an insurance policy to safeguard your (and their) investment. But, what do you need?
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The rules around letting out property are always changing so sometimes, it can be helpful to have everything you need to know, all in one place. this landlord’s guide to mortgages is designed to help you understand the different mortgage types open to buy-to-let properties – and which will maximise the potential income from your investment.
So, whether you’re looking to rent out your current home to help you buy another or to make a new investment, this landlord guide from our expert team at Mortgage Matters Direct will help you to get started.
For a little free advice that’s tailored to your own situation, be sure to get in touch with our mortgage advisors.
Buy-to-let mortgages are designed specifically for landlords who are planning on letting their property out. In order to qualify for a buy-to-let mortgage, you’ll often need to be able to secure a rental income that will cover your mortgage repayments by at least 125%. However, many lenders now offer the option of using some of your income to support the application if the rental figures do not work out. This is called top-slicing.
If you currently have a residential mortgage but are thinking about renting out your property, you will need to speak to a qualified mortgage adviser to obtain guidance on the best way to accommodate this.
Unlike a standard residential mortgage, a buy-to-let is often underwritten looking at the property rental value itself and not the borrowers’ income. The maximum you can borrow is related to the amount of rental income you’d expect to receive – so the property’s location, size and its amenities will all be looked at before a final loan amount is offered. However, if it looks like the achievable rental amount is not sufficient for the calculations to work out, then with some lenders this can be supplemented by income. A specialist mortgage adviser will be able to help you find the right product.
Higher deposit and fees
The minimum deposit for a buy-to-let mortgage tends to be higher than a residential purchase. When you work with a mortgage broker like Mortgage Matters Direct – who looks at all of the buy-to-let mortgages from the intermediary market – we’ll be able to lay out all of your options for you, helping you to find the right choice for you.
Most buy-to-let mortgages are taken as interest only – which means that you only pay the interest each month and the capital in full at the end of the term.
However, bear in mind, there are risks associated with this type of mortgage and consider what you are looking to achieve from the investment. Is it for income or for capital growth, is it for your retirement or to pass on to your children? All of these things may have a bearing on the repayment type that is right for you.
With a let-to-buy mortgage, you’re effectively taking out two mortgages – a residential mortgage on a property you’re moving to and a buy-to-let mortgage on your previous home so you can rent it out.
This is ideal if you’re having trouble selling your current home or like the idea of building a property empire.
As you can imagine, a let-to-buy mortgage can sometimes be tricky to arrange but with a little help, it needn’t be such a headache.
One of the obvious big wins with a let-to-buy mortgage is that it allows you to maximise your borrowing potential by releasing equity on your existing home. You could borrow against your existing property to provide a deposit for your new home.
If in doubt, a good property management service can help look after your venture.
If you’re new to renting out your home, you’ll probably have a number of questions about just what’s allowed under the guidelines of your existing residential mortgage.
Obviously, before you decide to do anything, you’ll need to get in touch with your mortgage provider to provide some clarification on the terms of your agreement. However, in our experience, this is what lenders typically suggest for would-be landlords:
As long as your income from taking in a lodger doesn’t exceed the government-sanctioned amount (currently up to £7,500), you won’t need to pay tax on your earnings. Normally, you can do this with a residential mortgage – however, it’s worth checking with your mortgage provider beforehand.
If you’re moving in with your partner or are relocating temporarily for work, you may want to let your property out temporarily. The good news is that you may not have to switch mortgages to do this. Some mortgage providers will allow this under your usual residential mortgage, by consent, for a limited period.
Bear in mind that each borrower is individually assessed – so what’s permitted for some applications won’t necessarily be allowed for you. Also, some lenders may charge an administration fee for this service or impose an interest rate levy. It will all depend on your lender.
Although, relatively speaking, Airbnb is still in its infancy, mortgage providers would treat this in the same way as they would a short-term let, and so will need to award a Consent to Lease to allow this. However, you may find that you’ll struggle to get permission from your mortgage provider to allow this kind of let.
Bear in mind that your home insurance provider will also need to give you permission or you’ll risk invalidating your policy.
In a word – no.
With all of the red tape that surrounds lettings, it’s tempting to just quietly rent out your home – particularly if this is just for holiday lets. However, if your mortgage provider or home insurer finds out (and believe us, they will), you’d be in breach of your terms and conditions, thus invalidating your mortgage agreement and your insurance.
You may not be aware that your Airbnb income now automatically feeds into the government’s Connect database, which effectively creates a full profile of every UK taxpayer – so a paper trail will exist.
Take our advice and be safe; speak to your mortgage provider beforehand.
You may have heard that landlords structured as a limited company are exempt from the new buy-to-let tax rules.
If you choose to go this route, you will have to pay corporation tax on your profits which, depending on your situation, may actually be the cheaper option. However, you should bear in mind that this is not right for everyone and it could lead to further implications down the line.
Arranging this is easy with the right help. Your first step would be to set up special purpose vehicle in order to buy the property. You can do this yourself online but remember to select the correct SIC (Standard Industry Classification) code which relates to letting property. Alternatively, you can arrange for an accountant to do this for you.
For more advice about how to apply for a buy-to-let or let-to-buy mortgage, get in touch.