What Is A Buy-To-Let Property?

Nikka Sulton

What Is A Buy-To-Let Property?

Buy-to-let involves purchasing a property with the intention of renting it out, typically through a specialized mortgage known as a buy-to-let mortgage. While commonly residential, buy-to-let investments also extend to student and hotel accommodations.

Who can get a buy-to-let mortgage?

If you’re considering renting out your property, securing a buy-to-let mortgage is essential. Eligibility criteria vary among lenders, often requiring you to meet specific conditions:

Some lenders may require you to already own a residential property, either outright or with an outstanding mortgage.
A good credit history and manageable existing debts, such as credit card balances, are typically necessary.
Proof of employment or self-employment income, usually above £25,000 per year, may be required alongside rental earnings.
Most lenders impose a maximum age limit, usually around 75 years.

A minimum 25% deposit, corresponding to a loan-to-value (LTV) ratio of at least 75%, is standard for buy-to-let mortgages.

Loan amounts are determined by rental income, which must cover at least 125% of monthly mortgage repayments.

How do buy-to-let mortgages work?

Buy-to-let mortgages share similarities with regular mortgages but have distinct characteristics:

Fees are typically higher than conventional mortgages.
Interest rates tend to be elevated.
Minimum deposit requirements usually range from 20% to 40% of the property’s value.
Most buy-to-let mortgages operate on an interest-only basis, where you pay only the interest monthly and settle the principal amount at the end of the term. Repayment options are also available.
Unlike residential mortgages, most buy-to-let lending falls outside the Financial Conduct Authority’s regulation. However, exceptions apply, such as letting to close family members, which adhere to stringent affordability regulations similar to residential mortgages.

Regulations governing advice, arrangement, lending, and administration of buy-to-let mortgages for consumers are subject to the same laws as residential mortgages and are regulated by the FCA.

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

The maximum amount you can borrow hinges on the projected rental income.

Lenders seek assurance that your rental earnings can cover mortgage payments with a surplus.

Typically, they require rental income to exceed mortgage payments by 25–30%.

Insufficient rental valuation may affect the required Loan-to-Value ratio, necessitating a larger deposit.

Consult local letting agents or online listings to estimate potential rental income.

Buy-to-let and tax

For basic rate taxpayers, Capital Gains Tax (CGT) on second properties is 18%; for higher or additional rate taxpayers, it’s 28%. CGT on other assets is 10% for basic rate and 20% for higher rate taxpayers.

When selling a buy-to-let property, CGT is applicable if the gain exceeds the annual threshold of £6,000 (£12,000 for couples). You can reduce CGT by deducting costs like Stamp Duty and solicitor fees from the capital gain.

Declare any property sale gains to HMRC and pay tax within 30 days. CGT is added to your income and taxed at your marginal rate (18% or 28%). CGT annual allowance can’t be carried forward or back; it must be used in the current tax year.

Income Tax

The rent you earn is considered taxable income and must be declared on your Self Assessment tax return for the relevant tax year. In England, Wales, and Northern Ireland, tax rates can range from 20% to 45%, based on your Income Tax band. In Scotland, rates vary from 19% to 47%.

Certain expenses, such as letting agent fees and property maintenance, can be deducted from your rental income. You’re only liable to pay tax on rental income if it surpasses your personal allowance for the tax year.

Mortgage Interest Tax Relief

Landlords can no longer deduct mortgage interest from rental income for tax reduction. Instead, a tax credit, equivalent to 20% of the interest part of mortgage payments, is provided. This change may lead to higher tax payments compared to previous methods.