If you’re stationed away from home and let out your home, you should tell your mortgage lender. In the past, if you rented out your home during deployment, you would have had to change to a buy-to-let mortgage, often incurring charges and a higher rate of interest.
Under a new agreement you will no longer have to do this - see Boxing Day deal on mortgages for Armed Forces on Gov.uk
Who can get a buy-to-let mortgage?
Money fitness tip
Talk to your lender as soon as you know you're going to let out your home. They may let you stay on your existing mortgage for a while.
You can get a buy-to-let mortgage if:
- You want to invest in houses or flats.
- You can afford to take a risk and understand the risks of investing in property.
- You already own your own home, whether outright or with an outstanding mortgage.
- You have a good credit record and aren’t stretched too much on your other borrowings such as credit cards.
- You earn £25,000+ a year. Otherwise you might struggle to get a lender to approve your buy-to-let mortgage.
- You’re under a certain age. Lenders have upper age limits, typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you are 45 when you take out a 25-year mortgage it will finish when you’re 70.
How buy-to-let mortgages work
Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:
- Interest rates on buy-to-let mortgages are usually higher.
- The fees tend to be much higher
- The minimum deposit for a buy-to-let mortgage is usually a 25% of the property’s value (although it can vary between 20-40%).
- Most buy-to-let mortgages are interest-only. This means you don’t pay anything each month but, at the end of the mortgage term you repay the capital in full. See Mortgage repayment options for more information. BTL mortgages are also available on a repayment basis.
- Most buy-to-let mortgage lending is not regulated by the Financial Conduct Authority (FCA). There are exceptions, for example, if you wish to let the property to a close family member (eg spouse, civil partner, child, grandparent, parent or sibling). These are often referred to as a consumer buy to let mortgage and are assessed according to the same strict affordability rules as a residential mortgage.
Advising, arranging, lending and administering BTL mortgages for consumers is covered under the same laws as residential mortgages and is regulated by the Financial Conduct Authority (FCA).
How much can you borrow for buy-to-let mortgages?
The maximum you can borrow is linked to the amount of rental income you expect to receive. Lenders typically need the rental income to be 25-30% higher than your mortgage payment.
To find out what your rent might be, talk to local letting agents or check the local press and online to find out how much similar properties are rented for.
Find out how much property is selling for in a particular area on the Rightmove website.
Where you can get a buy-to-let mortgage
Most of the big banks and a number of specialist lenders offer buy-to-let mortgages.
It’s also a good idea talk to a mortgage broker before you take out a buy-to-let mortgage, as they will help you choose the most suitable deal for you.
Learn more, including where to find an adviser, in Choosing a mortgage - get the right deal.
Using price comparison websites
Comparison websites are a good starting point for anyone trying to find a mortgage tailored to their needs. We recommend the following websites for comparing mortgages:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
- Don’t just look at the headline rates offered on the mortgage. There are often other fees and charges involved.
Plan for times when there’s no rent coming in
Don’t assume that your property will always have tenants. There will almost certainly be ‘voids’ when the property is unoccupied or rent isn't paid and you'll need to have a financial 'cushion' to meet your mortgage payments. When you do have rent coming in, use some of it to top up your savings account - see Cash savings.
You may also need savings for major repair bills. For example the boiler might break down or there may be a blocked drain. See Saving for emergencies.
Don’t rely on selling the property to repay the mortgage
Don’t fall into the trap of assuming you’ll be able to sell the property to repay the mortgage. If house prices fall, you might not be able to sell for as much as you had hoped. If this happens, you’ll be left to make up the difference on the mortgage.
Buy-to-let and tax
If you sell your buy-to-let property for profit, you will have to pay Capital Gains Tax if your gain exceeds the annual Capital Gains Tax threshold. Also rental income that exceeds your mortgage interest payments and certain other allowable expenses is liable to Income Tax.
Watch these videos from the Money Advice Service: Buy to let and Financial responsibilities if you rent out a property.
Capital Gains Tax
If you’re a basic rate tax payer, CGT on buy to let second property’s is charged at 18% and if you’re a higher or additional rate tax payer it’s charged at 28%. With other assets, the basic-rate of CGT is 10%, and the higher-rate is 20%.
If you sell your buy-to-let property for profit, you will usually pay CGT if your gain is higher than the annual threshold of £12,000 (for the 2019/20 tax year). Couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,000 (2019/20) to be made in the current tax year.
You can reduce your CGT bill by offsetting costs like Stamp Duty, Solicitor and Estate agent fees or losses made on a sale of a buy to let property in a previous tax year by deducting these from any capital gain.
Any gain from the sale of your property, should be declared on your Self Assessment tax return for that tax year and will be included when working out your tax status for the year which push you into a higher bracket.
The income you receive as rent is liable for income tax. This should be declared on your Self Assessment tax return for the tax year it was earned in.
This might be taxed at 20%, 40% or 45%, depending on your income tax band.
You can offset your rental income against certain allowable expenses, for example, letting agent fees, property maintenance and Council Tax.
Mortgage Interest Tax Relief
The rules around mortgage interest tax relief are changing. This will mean relief for finance costs on residential properties will be restricted to the basic rate of Income Tax.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Previously, you were able to deduct all of this interest on your mortgage from your rental income before tax was paid.
The amount of your interest payments you’re able to deduct is being reduced by 25% a year until 2020 and being replaced by a 20% tax credit for the entire amount.