brick-wallMany people like the idea of owning a property and getting a regular income by renting it out. Some are lucky enough to achieve this by purchasing outright. Others need to take out a mortgage to secure the property.

If you fall into the latter camp, you should bear in mind that any old mortgage won’t do if you’re looking to rent out. You’ll need a buy-to-let mortgage rather than a conventional one and you’ll notice several significant differences: 

  • You would normally need to put down a deposit of around 25% (this compares with as little as 5% for a standard mortgage if you’re buying a home to live in).
  • Rates for buy-to-let mortgages are typically about 1% or more higher than for standard mortgages. This is because there is greater risk to the lender.
  • Some providers will only lend to you if you already own your own home, while others will require you to have earned income of around £25k a year.
  • Lenders set an upper age limit on by when the mortgage has to be repaid; this is typically between 70 or 75.
  • The amount you can borrow is linked to the level of rental income your property is likely to generate. And that income must typically be around 25% higher than your monthly mortgage repayments.
  • Buy-to-let mortgages are usually offered on an interest-only basis, which means you don’t pay anything off the lump sum borrowed each month. Instead you will need to the capital in full at the end of the mortgage term – if you need to sell the property to repay the loan you should bear in mind that capital gains tax may be payable and there is no guarantee that the value of your property will have increased.

For many, the concept of buy-to-let is an attractive proposition as a regular income investment, particularly compared to low savings rates and stock market volatility.

However until recently, one of the main attractions of buy-to-let was that you could claim tax relief on the interest you paid and offset this against any rental income. But the Government announced changes to the system in its summer 2015 Budget, with the Chancellor slashing the tax relief that private landlords receive on their mortgage interest payments, cutting it from 40%/45% at the moment to 20% by April 2020.

Please bear in mind: property investment is risky and illiquid, you should only participate if you can afford to take that risk. You should always compare the different deals available and speak to a specialist adviser to find the right deal for you. Also, check any arrangement fees as these can add substantially to the overall cost of any mortgage deal.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Buy to let (pure) and commercial mortgages are not regulated by the FCA. Think carefully before securing other debts against your home.