Do Buy To Let Mortgages Depend On Income

Nikka Sulton

Do Buy To Let Mortgages Depend On Income

BTL mortgages are for landlords looking to buy a property for renting. The rules for these mortgages are different from regular home loans.

Who can get a buy-to-let mortgage?

If you’re thinking about renting out your place, you’ll need a buy-to-let mortgage. Because it’s seen as riskier by many lenders, there are specific conditions to qualify. These conditions vary between lenders and might include:

Owning your own home may be required, either fully paid or with an outstanding mortgage.
Having a solid credit record and not being heavily stretched on other borrowings, like credit cards.
Showing evidence of employment income or earnings from self-employment, usually £25,000+ per year. If you earn less, some lenders might be hesitant.
Meeting a maximum age requirement, typically around 75 years, though some lenders may set lower limits.
A loan-to-value ratio (LTV) limit of at least 75%, meaning a minimum 25% deposit for a buy-to-let mortgage.
Borrowing amount is determined by the monthly rent, which should cover 125% of your mortgage repayments.

How do buy-to-let mortgages work?

Buy-to-let mortgages are similar to regular mortgages but have some differences:

Fees are generally higher.
Interest rates are typically higher.
The usual minimum deposit is 25% of the property’s value, though it can range from 20-40%.
Most BTL mortgages follow an interest-only structure, where you pay only the interest monthly and settle the original loan at the mortgage term’s end. Repayment options are also available.
Many BTL mortgages aren’t regulated by the Financial Conduct Authority (FCA). However, exceptions exist, such as letting the property to close family members, known as consumer buy-to-let mortgages. These follow strict affordability rules like residential mortgages.
Activities like advising, arranging, lending, and administering BTL mortgages for consumers adhere to the same regulations as residential mortgages, regulated by the FCA.

How much can you borrow for buy-to-let mortgages?

The maximum amount you can borrow depends on your expected rental income.

Your lender will ensure that your property’s rental income can cover the mortgage payments and a bit more.

Typically, lenders require the rental income to be 25–30% higher than your mortgage payment.

If the property’s rental valuation isn’t sufficient, it may affect the required Loan-to-Value (LTV), necessitating a larger deposit.

To estimate potential rent, consult local letting agents or check online rental listings for similar property rates.

Buy-to-let and tax

Capital Gains Tax

For basic rate taxpayers, Capital Gains Tax (CGT) on profits from selling buy-to-let second properties is 18%, while higher or additional rate taxpayers face a 28% charge. In comparison, CGT on other assets is 10% for basic-rate and 20% for higher rate taxpayers.

If you make a profit selling your buy-to-let property exceeding the annual threshold of £6,000 (for the 2023/24 tax year), CGT usually applies. Joint asset ownership by couples allows combining this allowance, potentially allowing a £12,000 gain (2023/24) in the current tax year.

You can lessen your CGT by deducting costs like Stamp Duty, solicitor and estate agent fees, or losses from a previous tax year’s sale of a buy-to-let property from any capital gain.

Declare any property sale gains to HMRC and settle the tax within 30 days. The capital gain is added to your income and taxed at your marginal rate (18% and/or 28%). It’s not possible to carry forward or back any CGT annual allowance, so it must be utilized in the current tax year.

Income Tax

The rent you receive is considered taxable income and may be subject to Income Tax. It should be reported on your Self Assessment tax return for the relevant tax year.

In England, Wales, and Northern Ireland, the tax rate may be 20%, 40%, or 45%, depending on your Income Tax band. In Scotland, it could be 19%, 20%, 21%, 42%, or 47%.

Certain allowable expenses, such as letting agent fees, property maintenance, and Council Tax, can be deducted from your rental income.

You’ll only be taxed on your rental income if your total income for the tax year surpasses your personal allowance.

Mortgage Interest Tax Relief

Landlords can no longer subtract mortgage interest from rental income to lower their tax. Instead, you’ll get a tax credit equivalent to 20% of the interest portion of your mortgage payments. This alteration in the rule might result in higher tax payments compared to what you paid before.