What is a Buy To Let mortgage?
A buy to let mortgage is comparable in many ways to a residential mortgage. There are however some notable differences….firstly the interest rate is typically higher and you usually are required to put down a larger deposit.
Lenders will look at the expected rental income and don’t assess the mortgage on your personal income as they would with a typical residential mortgage. If you want a mortgage for a property you are going live in, a lender will look at many factors, including your personal income and expenditure to help decide if they are happy to make an offer.
The harsher conditions reflect the higher risks attached to buy to let mortgages as statistically borrowers are more likely to default on a buy to let mortgage than residential mortgages.
What is the maximum amount I can borrow to purchase a buy to let property?
Most lenders will allow you borrow up to 70% of the value of the property. This will be conditional on the potential rent on the new property.
What do I need to know when buying a rental property?
Property is traditionally a good investment and a buy to let makes it possible to boost your monthly income whilst investing for the long term.
So long as the rent paid to you covers or exceeds your monthly mortgage payments, you could make a tidy profit.
You might also make a nice return when it comes to selling up but like all investments, there are the usual risks attached to buy to let.
Seeking out the right property in the the most appropriate location is important when deciding on a buy to let property.
Students for example are likely to want an affordable property in proximity to a university whilst families will be particularly keen to rent a property having a garden and to be near schools and other amenities.
Can I afford a buy to let property?
Generally, lenders determine how much you can feasibly borrow by looking at the property's overall value and the expected rental income.
It's usual practice to build in a safeguard too. This allows for latent costs such as the property occasionally being empty, paying estate agency fees, taxes and expense on maintenance. It is calculated by using what's known as the interest times cover ratio. The Interest times cover ratio determines the amount the lender would like the rental income to be, to cover the mortgage and other costs.
Regulation changes of late mean these calculations have got more stringent. Lenders will also 'stress‒test' the mortgage, to make sure that an increase in interest rates won't cause any problems and you will still make a profit. The minimum stress test rate is usually 2% above the actual rate.
Will personal income be factored into assessment for Buy to let mortgage?
Some lenders will take into consideration your personal income if the stress-tested monthly rental calculation explained above falls short. They will assess how much you earn compared to all you spend, including your residential mortgage, household expenditure and rental property costs.
Should you have additional income after covering all your outgoings, these lenders will combine it with expected rent to calculate the maximum amount you can borrow.
What if I am a professional landlord?
If you already own 4 or more properties, or intend to further extend your portfolio, there are now additional regulatory requirements for lenders to factor in to their assessments. The regulation is not arbitrary, but some examples include the lender's relationship with the borrower, how much experience the borrower has as a landlord, and a view of the borrower's overall property portfolio.
What taxes should I be aware of as a Landlord?
As of Feb 2022 the current rate of Stamp duty on purchasing a buy to let property is 1%.
If purchased in your own name then the property will be liable to pay Income tax on any rent coming in less qualifying expenses.
What are the qualifying expenses?
Allowable expenses as per the revenue site are as follows :
• rates you pay to a local authority for the property
• rents you pay for property such as ground rents
• insurance premiums against fire and public liability
• maintenance of your property such as cleaning, painting and decorating
• property fees before you first rent out your property such as management, advertising, legal or accountancy fees
• certain mortgage protection policy premiums
• expenses in between renting out the property in certain circumstances
• capital allowances
• repairs, such as rot treatment, repairing windows, doors or machines
• certain pre-letting expenses on vacant residential property
• the cost of registering with the Residential Tenancies Board (RTB).
• cost of any service or goods you provide that are not repaid by your tenant (such as electricity, central heating, telephone, service charges, water and refuse collection).
If your property value increases from the time you purchase to the time you sell it you will be liable for Capital Gains Tax.
Can a buy to let property be financed through a company?
Yes, a property can be purchased through a Special Purpose Vehicle (SPV)
A mortgage can be incorporated through the company applying for a Buy to Let mortgage .
Usually a minimum of 35% deposit is required to purchase the property through the company
All income from the property is paid directly to the SPV and all repayments on the mortgage are paid by the SPV.
The company rather than the individual is responsible for the debt on the property.
Can a buy to let property be purchased through my pension?
Yes you can purchase a property through your pension. You will need to Self Direct your pension and will be subject to stringent pension rules.
What additional costs should I consider as a Landlord?
- Taxes Due on rent
- Energy Cert
- Overall Maintenance of the property
- Home Insurance
- Tax due on any capital gains
- Landlord Insurance
If you have a query about buy to let mortgages, we’d love to help
Get in touch by calling us on (01) 513 8710 or emailing on info@citywidefinancial.ie