What is a Consumer Buy to Let Mortgage
Consumer buy-to-let (CBTL) mortgages are any buy-to-let contracts that are not entered into by an individual ‘wholly or predominantly’ for the purpose of a business.
They are usually more expensive than residential mortgages.
Consumer buy-to-let mortgages are only suitable for people who have become a landlord by default as opposed to making an active business decision, for example, where a property has been inherited or has been previously lived in and the individual is unable to sell it, so resorting to a buy-to-let arrangement (BTL).
Investing in property is risky, so you shouldn’t take out a BTL mortgage if you can’t afford to take that risk.
They are in many ways just like residential mortgages, but with some key differences:
- Interest rates on buy-to-let mortgages tend to be higher
- The minimum deposit for a buy-to-let mortgage is usually a quarter (25%) of the property’s value (some lenders offer deals with a 20% deposit, others want a 40% deposit)
- The fees tend to be much higher
- The level of borrowing is typically based on the level of rental income
- A 3% stamp duty surcharge applies, which applies to the entire purchase price of the property
Most BTL mortgages are interest-only, which means you don’t pay anything off the lump sum borrowed each month but, of course, at the end of the mortgage term you need to repay the capital owing in full.
Unlike obtaining a mortgage on a property you wish to live in, BTL mortgage lending is not regulated by the Financial Conduct Authority (FCA).
With repayment mortgages you pay the interest and part of the capital (the amount you borrowed) off every month. At the end of the term, typically 25 years, providing you pay all mortgage repayments due, you should manage to have paid it all off and own your home.
With interest-only mortgages, you pay only the interest on the loan and nothing off the capital.
Although BTL mortgages are typically on an ‘interest only’ basis, with the property being sold at a later date, with the potential of generating sufficient monies to fully repay the outstanding loan at the end of the term, the lender may require you to have a repayment strategy in place so that you have sufficient funds available to fully repay the loan at the end of the mortgage term.
Failing to maintain an adequate repayment strategy could result in you having difficulty in fully repaying the mortgage capital at the end of the term. You should review the progress of your repayment strategy on a regular basis to ensure enough capital is available when repayment becomes due. The mortgage lender will also check during the term of the mortgage that your repayment strategy remains in place and still has the potential to fully repay the capital borrowed.
Current Account Mortgage
A current account mortgage reduces the overall amount 'owed' when your savings or current account balance are taken into account. The mortgage and current/savings account are normally combined into a single account, effectively acting like one big overdraft.
The lender normally stipulates a minimum amount that needs to be left in the account each month to repay your mortgage over the agreed period. If there is a surplus, then you will pay less interest and pay off your mortgage early. Similarly, if you leave less than the required amount in the account, you will end up paying more for your mortgage.
A current account mortgage also normally has the typical features of a current account such as a cheque book, access via cash machines, direct debits etc.
An offset mortgage sees your earnings paid in, permits overpayment, underpayment, lump sum deposits, payment holidays and all the other features of a flexible mortgage, as well as giving you a cheque book, debit card and the facility to set up direct debits. However, instead of combining all the accounts (current account, mortgage and savings) into one and having a single balance, the different components are kept separate, but work towards reducing the mortgage debt.
The three different accounts are not usually charged at the same rate of interest, the lender charges a set rate of interest on the current account and the savings account OR will 'sweep' the marketplace and apply the best rate of interest that can be found for each particular component. The balance in the two accounts is then added together and the total is then offset against the mortgage.
Importantly, because you're not receiving interest on your current account or savings there is no tax payable.
Often, monthly payments will remain at an equal amount and 'overpayments' are used to reduce the overall mortgage debt. This is how you can pay off your mortgage early and save money with an offset mortgage. Some lenders will amend the monthly mortgage payment instead so that you benefit from lower payments but, of course, you won't be able to pay off your mortgage early.
Types of interest rate
Fixed Interest Rate/ Stepped Fixed
The mortgage has a ‘fixed’ mortgage interest rate, so you pay a set amount each month for the duration of the fixed period. This allows you the security of knowing your exact monthly commitments in the early years of the mortgage, unaffected by changes in the underlying interest rates. If interest rates fall below the fixed rate you will, however, continue to pay the higher, fixed amount.
Variable Interest Rate
The mortgage has a variable interest rate which can rise and fall in line with market conditions. This does involve a degree of uncertainty as your monthly repayments can vary and increase but will allow you to benefit from a fall in interest rates.
Discounted Variable Interest Rate
The mortgage has a discounted variable interest rate. This does involve a degree of uncertainty as your monthly repayments can vary and increase but it allows you to have a discount on your mortgage payments for a specific period and to minimise your monthly payments, it also allows you to benefit from a fall in interest rates.
The mortgage has a tracker interest rate. This means that the interest rate is linked to the [Bank of England Base Rate/LIBOR] and is equivalent to that rate plus a certain percentage. This does mean that your monthly premium may vary and can increase and therefore involves a degree of uncertainty, but this does allow you to benefit from a fall in interest rates.
The mortgage has a capped interest rate which means that the lender has put a “cap” on the maximum interest rate that can be charged. It provides the security of knowing that your monthly repayments will not rise above a certain amount, whilst allowing you to benefit from any drop in the rate below the cap.
Most lenders will expect you to own your home, whether outright or with an outstanding mortgage and you must have a good credit record and not be stretched too much on your other borrowings such as any existing mortgage(s) and credit cards. Your earnings will also be taken into consideration and if they are less than £25,000 a year you are likely to find it harder to get a buy-to-let mortgage.
You will need to prove your income, and show the lender evidence of any outgoings, including debts, household bills and other living costs such as clothing, childcare and travel costs.
Lenders will have their own upper age limits - typically between 70 or 75. This is the oldest you can be when the mortgage ends not when it starts. For example, if you are 45 when you take out a 25-year mortgage it will finish when you’re 70.
The maximum you can borrow is linked to the amount of rental income you expect to receive. Lenders typically need the rental income to be a quarter to a third higher than your mortgage payment (25–30%).
If you are considering using a limited company to purchase a buy-to-let, you should seek professional advice from an accountant.
If you sell your buy-to-let property for profit, you will need to pay Capital Gains Tax if your gain exceeds the annual Capital Gains Tax threshold. Also, rental income that exceeds your mortgage interest payments and certain allowable expenses1 are liable to Income Tax.