Wimbledon is not just known for the annual tennis tournament that sees thousands of visitors descend on SW19 each year. The chic enclave of Wimbledon Village is one of the most sought-after addresses in the capital. Here, large family homes can command rents of more than £10,000 per month making property investment in or near Wimbledon Village a profitable venture.
UK-based investors looking for a buy-to-let property near Wimbledon Common may find they require a buy-to-let-mortgage. The rules around buy-to-let mortgages are similar to those for regular mortgages, but there are some key differences.
Here we explore what you need to know before you apply for a buy-to-let mortgage.
What is a buy-to-let mortgage?
Buy-to-let mortgage is a mortgage arrangement in which an investor borrows money to purchase property in the private rented sector to let it out to tenants.
If you plan to rent out a home you have previously lived in on which you have a ordinary residential mortgages, you will likely need to switch to a buy-to-let product before searching for tenants.
What is the difference between a buy-to-let mortgage and a residential mortgage?
Buy-to-let mortgages are a lot like ordinary mortgages, but with some key differences:
1. You will need a lower loan to value ratio
A lender’s loan to value (LTV) determines how much an investor can borrow in relation to a property’s worth. While buy-to-let lenders offer maximum LTV ratios of 75% or higher, the best rates are reserved for investors taking out a loan with an LTV ratio of 65% or lower. This means that if an investor wanted to purchase a spacious ground floor apartment with a private patio situated in a prime position in Wimbledon Village for £845,000, a lender would only offer their most competitive rates on a £549,250 buy-to-let mortgage.
A further consideration when it comes to LTV ratio is the size of the home loan. Many buy-to-let mortgage providers reduce the LTV ratio to 50% if the mortgage value is £1.5m or over.
2. Affordability rules are based on interest cover ratios
To make sure an investor can afford to keep up the repayments on a buy-to-let mortgage, lenders look at the relationship between the rental income a property generates and the cost of the loan.
Most mortgage providers require a buy-to-let interest coverage ratio between 125% to 140%.
If the interest charged on an £845,250 landlord mortgage is £1087 per calendar month, the property would need to generate a rental income of at least £480 each week to meet the 140% interest coverage ratio requirement.
3. Most buy-to-let mortgages are interest-only
For buy-to-let mortgages, it’s far more common for offers to be made on an interest-only basis. This means that your monthly payment pays only the interest charges on your loan, not any of the original capital borrowed. This means your payments will be less than on a repayment mortgage, but at the end of the term you’ll still owe the original
Buy-to-let repayment mortgages are also available and are becoming a popular alternative.
4. The fees and interest rates tend to be higher
Usually, a buy-to-let mortgage will incur a higher buy to let rate of interest, this is because lenders often seek extra security, because there are likely to be void periods while renting out a property, or the tenant may fail to keep up with their payments.
Arrangement fees can also be much higher, be sure to look at these as well as interest rates when shopping around for the best deal.
Who can get a buy-to-let mortgage?
Not everyone is entitled to take out a buy-to-let mortgage. Most lenders imposed the following criteria:
1. Earn at least £25,000 in non-property income
In addition to the income a property investment can generate, many buy-to-let mortgage lenders require investors to be able to prove they have a income of at least £25,000 per year.
For would-be landlords whose income comes from self-employment, lenders will usually require a minimum trading period of at least 12 months.
2. Already own your own home
A growing number of buy-to-let mortgage providers require first-time property investors to be homeowners, and to have paid their mortgage without any problems for at least 12 months.
3. Satisfy the maximum age criteria
Many buy-to-let products are open to those who will be 70 or younger at the end of the mortgage term. For this reason, you may find it difficult to get a buy-to-let mortgage if you’re over 45. However, as people are retiring later and looking to rental property to fund their retirement, many lenders are becoming more flexible in this regard. For example, Santander has extended the maximum permitted age at the end of the mortgage for its buy-to-let products to 85. TMW, which is part of Nationwide Building Society make their buy-to-let mortgage open to borrowers in their 90s so long as they had applied for the product before they reached 70 years old.
What happens at the end of my interest-only buy-to-let mortgage?
If you have an interest-only buy-to-let mortgage, your repayments have been paying the interest but have not reduced your loan balance. This means that you will need to repay the loan in full at the end of the mortgage term. Most landlords do this by selling the property. If house prices have gone up, then you will release your profit. However, if house prices have fallen in your area, you will need to make up the shortfall with your own money.
Remember that landlords must pay Capital Gains Tax (CGT) on any gains they make from selling their buy-to-let property. Read our blog or more information on CGT.
Can I get tax relief from a buy-to-let mortgage?
Until 31st March 2017, landlords could deduct all mortgage interest payments from their rental income to determine their taxable profits. For landlords with a large buy-to-let mortgage, this significantly reduced the tax they had to pay. For example, consider a landlord who received £1,000 per month in rent and paid £500 per month in mortgage interest.
- They’ll pay tax on their £6,000 annual profit. (£1,000 x 12) – (£500 x 12)
- A basic rate taxpayer would pay £1,200 in tax. £6,000 x 20%
- A higher rate taxpayer would pay £2,400. £6,000 x 40%
However, from April 2017, this all changed. In 2017-18 the tax relief you could claim reduced to 75%. Then in 2019-20 it was only 25%. As of April 2020, it has gone completely.
Instead, you receive a tax credit of 20% on your mortgage interest payments. Basic rate taxpayers are unaffected, but higher and additional rate taxpayers face a substantially higher tax bill. Continuing the example from above,
- They’ll now pay tax on the full £12,000 they earn
- They will still pay £6,000 in mortgage interest
- They’ll receive a tax credit of £1,200
- A basic rate taxpayer will pay £1,200 in tax – no change. (£12,000 x 20%) – £1,200
- A higher rate taxpayer would pay £3,600 – 50% more tax. (£12,000 x 40%) – £1,200
Less obviously, more landlords are being pushed into the higher tax brackets as they are now forced to declare their entire rental income.
As Wimbledon Village property specialists, we can advise buy-to-let investors on which homes in and near Wimbledon, Coombe and Kingston Hill will meet your investment requirements. For more information on buy-to-let properties in Wimbledon, contact Robert Holmes & Co today.