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Many people have become landlords using a buy-to-let mortgage in the last decade as a way of boosting their income or to save for their retirement. If you have ever thought about buying a property to rent out here we explain how buy-to-let mortgages work.
If you want to borrow money to buy a property to rent out, you need a particular type of mortgage called a buy-to-let mortgage. Although buy-to-let mortgages work in a very similar way to standard residential mortgages there are some important differences:
You may need a minimum income to be eligible for a buy-to-let mortgage, and although how much you can borrow depends more on the rent you can charge than your income, you still need to be able to show you can afford to make the repayments, even if interest rates rise.
With a buy-to-let mortgage the rent you can charge for the property needs to be at least 125% of your monthly mortgage repayment on the buy-to-let mortgage. However, due to tightening of regulations, some lenders have increased this to 145%. This means that if your mortgage repayment is £1,000 you need to be able to rent out the property for £1,250 or £1,450 per month.
Since April 2016 if you buy a second home, including a buy-to-let property, the amount of stamp duty you have to pay has been increased by 3%. This means that if you purchase a property worth £200,000 to rent out instead of paying £1,500 of stamp duty, you would be charged £7,500 - an increase of £6,000.
If you are a higher rate taxpayer (you earn more than £50,000 in the 2019 to 2020 tax year) one of the big advantages of buy-to-let was that you could reduce your income by the full amount of the interest you were paying on your buy-to-let mortgage. However, by 2020 this is being reduced so that you will only be able to reduce your income by 20%, not 40% for higher rate taxpayers.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.