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. Our 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 need to be able to secure a rental income that will cover your mortgage repayments by at least 125%.
If you currently have a residential mortgage but are thinking about renting your property out, you’ll need to switch to a buy-to-let mortgage. Even if you’re just thinking of taking in a lodger, you’ll need to let your mortgage provider know.
Unlike a standard residential mortgage, a buy-to-let is underwritten from the property 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.
That being said, most mortgage providers will only lend to individuals who earn at least £25,000 a year and usually have an upper age limit.
The minimum deposit for a buy-to-let mortgage tends to be a little higher than average – usually 25% of the property’s value. As well as this, mortgage providers usually charge slightly higher fees for a buy-to-let mortgage – however, this will vary from lender to lender.
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 interest only – which means that you only pay the interest each month and the capital in full at the end of the term.
Bear in mind, there are risks associated with this type of mortgage and your home may be repossessed if you can’t make the final repayment. It’s up to you to make arrangements – known as a repayment vehicle – to cover the final balance. This can be an ISA, investment fund or pension.
To apply for any mortgage, you’ll need to have good credit. However, when applying for a buy-to-let mortgage, you may also need to already own a property and have been paying your mortgage problem-free for at least a year.
You may have already heard that tax relief for buy-to-let mortgages are gradually being phased out. In the 2019/20 tax year, you’ll be able to deduct 25% of your costs from your rental income before tax is due. However, that will fall to zero in 2020/21, so soon you won’t be able to deduct any of your costs.
As well as this, any rental income exceeding your mortgage interest payments and certain allowable expenses are subject to Income Tax.
Finally, if you later sell your buy-to-let for a profit, it will be subject to Capital Gains Tax if in excess of the annual threshold. To check what the annual threshold currently is, visit the government’s website.
With a let-to-buy mortgage, you’ll effectively be 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 not quite ready to say goodbye to your old home – for instance, if you’re moving in with a new partner and want to still have the security of your previous property.
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.
So, if your current home (the property which you’re looking to let out) is worth £200,000 and your mortgage is £150,000, you could potentially borrow £170,000 and use the extra £20,000 as a deposit on your new home.
Mortgage providers tend to like this kind of mortgage since they’re assured that you’ll have some income coming in (from your let) – and this will be reflected in your interest rate.
Speak to Mortgage Matters Direct about this kind of mortgage and we’ll have you set up in no time.
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 probably won’t have to switch mortgages to do this.
Some mortgage providers will allow this under your usual residential mortgage, by offering a Consent to Lease (also known as Permission to Let). Effectively, this is a document which allows you to rent out your home for a duration – be it one, two or even three years. At the end of this agreed period of time, most lenders will probably insist that you convert to a buy-to-let mortgage (or let-to-buy).
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.
With the advent of Airbnb, many savvy homeowners are looking into creating an additional income by letting out their homes to holidaymakers over the summer. As long as you don’t mind other people sleeping in your bed or the occasional breakage here and there, this is a great way to cover your mortgage repayments, or to help you overpay.
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.
Unlike a short-term let where your property will be home to a single tenant, a holiday let will allow multiple tenants to stay in the property, drastically increasing the risk of damage to your lender’s investment. To off-set this, your mortgage provider may increase your interest rate or charge a fee – this will all depend on your lender.
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.
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.