For anyone considering buying property to rent out in Brighton or Hove, financing your project is probably your first consideration. Unless you have a significant sum to invest, you’re probably looking at taking out a mortgage. The first thing to note is that buy to let loans aren’t just any old mortgages – there are key differences between them and residential products.
To help you understand the rules and decide if a buy to let mortgage will be affordable for you, we answer a few frequently asked questions on the issue.
A buy-to-let mortgage is one designed for rental properties. Buy to let mortgage rates, deposits and some charges are likely to differ from residential deals. This is because rental properties are seen as a riskier prospect for lenders than owner-occupied homes – if your tenant fails to pay their rent or you can’t find one in the first place, you may struggle to afford your mortgage. As you shop around for a mortgage offer it’s important to be clear from the outset that you’re looking for a buy to let product.
To be granted a buy-to-let mortgage, you will need to demonstrate that you will meet the monthly repayments. This means that you will need a good credit history with no substantial debts and a decent income aside from the rent you will receive.
You will also need to show that the property you intend to buy will be a good investment – that there is enough of a market for you to find tenants and that you will receive more money in rent than your monthly outgoings.
Being a first-time buyer won’t prevent you from getting a buy to let mortgage offer, but you may find it more difficult to secure a loan than if you have owned property before. This is because fewer buy to let mortgages are available to first-time buyers. The same applies if you have decided to rent out property through a limited company.
To find out how much you might be able to borrow, use an online buy to let mortgage calculator tool – most banks and comparison sites have one.
Buy to let mortgages tend to be granted on an interest only, rather than repayment basis, which means you’ll only pay the interest on the loan each month, not a proportion of the sum borrowed.
This will bring down your monthly costs, but you won’t have paid off the loan at the end of the term. Many people assume they will cover the loan by selling the property, which may work out, if you’ve had the property for long enough, but can’t be guaranteed. If the home has fallen in value or you can’t sell it, you will still need to meet the debt in some other way.
Buy-to-let mortgages often come with higher fees than residential ones – some lenders charge more than £2,000 upfront. As with standard residential mortgages, some providers will offer deals with a lower fee in exchange for a higher initial interest rate.
Most lenders need to be convinced that the rental income will cover the mortgage payments with money to spare before they’ll consider your mortgage application. They are likely to look at your personal income too.
Lenders always demand a larger deposit for buy to let property mortgages. This could be around 25% of the property’s value but may be as high as 40%. The bigger the deposit you have, the more likely you are to get a mortgage offer and a better overall interest rate.
Most high street banks offer buy to let products but there are specialist lenders too. Start by looking on comparison sites but be careful to factor in fees as well as mortgage rates before submitting your mortgage application. Depending on your circumstances, it might be difficult to find a loan – if you’re a first-time buyer or don’t have a good credit history, for example. Talking to a specialist broker may be a good idea to help you find the best deal.
You’ll need to meet your monthly repayments, even during void periods when you have no rental income or if your tenant defaults on their rent. Make sure you’ll have enough money to cover payments if you need to. While your rent is being paid, always put some aside as a contingency if things change or you need to carry out major repairs. Rent guarantee insurance is also worth considering.
It is a good idea to work out the rental yield of a property to ensure that it is affordable and a financially sound investment. The rental yield refers to how much money the property generates from rental income which, in the UK, is currently around 5%, on average.
To work out the gross percentage yield, divide the annual rental income you will receive, by the purchase price of the property, then multiply this figure by 100 to give you a percentage.
Previously, landlords with buy to let mortgages could claim generous tax allowances on the interest paid. This has changed gradually over the past five years. As of 2020, buy to let borrowers are entitled to a 20% credit on their interest payments. As a landlord, you will need to pay income tax on the profit you make from renting out property. You will also need to pay capital gains tax on the rise in the value of the property when you come to sell it.
Unless you have bought a buy to let property as a first-time buyer, you will be subject to an extra 3% stamp duty rate compared to a normal residential stamp duty rate.
The amount you pay is worked out using a tiered system so you will pay a different rate on the different portions of the property as the value increases. See below for the current stamp duty rates on holiday homes and buy to let properties.
| Portion of the property price | Percentage to pay |
| Up to £250,000 | 3% |
| The amount between £250,001 – £925,000 | 8% |
| The amount between £925,001 – £1,500,000 | 13% |
| The amount from £1,500,001 | 15% |
To work out how much stamp duty you will need to pay on your buy to let property, then use the gov.uk online stamp duty calculator.
If you already have a residential mortgage on a property that you are renting out, you need to get in touch with your lender as soon as possible – your mortgage could be invalid if you don’t.
You can apply to rent out your property and your lender may allow you to keep the residential mortgage under a ‘Consent to Let’ arrangement for a certain period of time but they may also insist you switch to a buy to let deal.
If you’re thinking of investing in a buy to let property in Brighton or Hove, we can advise you about any aspect of your new venture – including finance – to help you find the best deal. Call us with any questions or to discuss our portfolio of properties and our services for landlords.
Do you have any questions about the topic above? Our team of experts is here to help in answering any query you may have.
Fueled by his desire to be the best, most reputable estate and lettings agent in town, Steve has spent his career cultivating The Property Shop. Steve prides himself on his authenticity, honesty, and knowledge-base which is emulated by The Property Shop and his team.
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