Buy to let mortgages are specifically designed to allow investors to purchase a property in the private rented sector, with the intention of letting it out to tenants. They’ve been around in the United Kingdom since the late 90’s.
The amount of money investors can borrow in the form of a buy to let mortgage depends on the rental valuation of the property. Generally, the annual income generated from the rental income will have to be enough to cover a certain percentage of the mortgage repayments, usually around 120% to 150%. This factors in any unexpected costs, maintenance and periods where there are no tenants living in the property, ensuring there will be surplus rent to cover these payments and void periods.
There are also alternative ways in which some lenders calculate the amount they will lend you. Some will offer you three times your salary plus half the rental income. Other lenders will take into account your salary and any existing load commitments that you have, and then apply the “deduction rule”. So they could offer you as much as 3.5 times your salary, minus an agreed on amount for your annual mortgage repayments worked out at a pre-agreed on level of interest. So, as an example, let’s say you have an annual salary of £40,000 per year and have an outstanding mortgage on your property of £120,000. Your annual mortgage repayments could be calculated as £10,000 per year. So with this calculation, the £10,000 would be deducted from your salary of £40,000, leaving you with £30,000 which is then multiplied by the 3.5, giving you an amount you can borrow of £105,000.
In the eyes of the banks and other forms of lenders, buy to let mortgages are seen as a greater risk, compared to regular, owner-occupied mortgages. This results in the interest rates and fees on a buy to let mortgage being slightly higher.
During recent years in the United Kingdom, alongside the increase in house prices, the buy to let investment model has become increasingly popular. This popularity has also been due to the tax benefits of being a buy to let investor in the UK. From a tax perspective, rental income is handled the same way as a regular salary, and so is often taxed at just 22% or 40%. But before that, landlords can fist deduct certain costs from the taxable portion of the rental income, including maintenance costs and also the interest figures from the buy to let mortgage repayments.
If you would like further details please do not hesitate to contact us on 0800 612 7729 or fill in a few details on enquiry form and have one of the Leapfrog Finance Advisors call you back, alternatively, email us at Enquiry@leapfrogfinance.co.uk