Buy-to-let and Holiday
let mortgages

Investing in property for your future
financial independence

Buy-to-let and Holiday let mortgages

Buying a second property as an investment and by letting it out, you may be able to make the house pay for some of itself. The money you receive as rent can also ‘top up’ your existing salary, and some landlords rely on it as their sole source of income. Of course, there are some risks involved in buying to let, so make sure you have all the facts first.

If you decide to buy a house with the express purpose of letting it out, you’ll need to get a buy-to-let mortgage. Like residential mortgages you’ll put down a deposit and make monthly mortgage repayments. However, a buy-to-let mortgage may have a number of differences.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME FORMS OF BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

How much the property can earn in rent payments

They’re usually interest-only mortgages and you’ll usually need a larger deposit. Interest rates tend to be higher on buy-to-let mortgages and the amount you can borrow is typically based on how much the property can earn in rent payments, rather than how much you earn.

Typically, you’ll need 25% or more of the property’s purchase price as a deposit for a buy-to-let mortgage. However, you may find some lenders who accept a 20% deposit. Remember that the size of your deposit (among other things) affects how much you’ll pay each month – typically, a larger deposit means smaller monthly payments.

How much you can earn and save in rent

Most buy-to-let mortgages are interest-only, meaning you only pay the interest on the mortgage each month. Then, at the end of the mortgage term, you repay the loan in full. It’s worth noting that to get a buy-to-let mortgage, your lender may need to see evidence of your ability to pay off the full amount at the end of the term – this is usually based on how much you can earn and save in rent.

Getting a buy-to-let mortgage is classed as a business transaction, so the interest rates tend to be higher than with residential mortgages. The interest rate you’re offered may depend on how much you’re borrowing, the value of your property, and how much rent it’s expected to earn. Like residential mortgages, you may get a buy-to-let mortgage with a fixed or variable rate.

Professional advice as part of your application process

When assessing your application for a buy-to-let mortgage, lenders will usually want to know how much the property will earn in rent. Many lenders require that the annual rental income is at least 125% of amount you pay in interest on the mortgage per year. So, when looking for buy-to-let property, you may want to receive professional advice as part of your application process.

At Strathon Park, we search and compare mortgages from various lenders, to find the best offer for you. You should also think about what type of interest rate you want, for example, fixed, variable or tracker. 

Holiday let mortgages

Holiday let mortgages enable you to invest in residential property with the opportunity to purchase a future retirement home now, at today’s prices, and enjoy some income and growth before eventually moving to it.

A holiday let mortgage is not the same as a mortgage used for a buy-to-let property. In the case of a holiday let mortgage, the holiday letting income is firstly identified using a projection from a local or national holiday letting agency. Evidence of this projection is required at mortgage application stage.

Value and suitability of the security property

This information is passed to the lender’s surveyor whose remit from the lender is to comment on the value and suitability of the security property and then on the credibility of the projection. If a projection were to come from an agent who is geographically too far away, it might not be credible.

Mortgages to purchase a holiday let property or business are available to individuals, partnerships, trusts, trading limited companies and Special Purpose Vehicle (SPV) companies.

Income produced by the property being used as a holiday let

You will require a good size of deposit if you intend to purchase a holiday let property using a mortgage. Within loan to value (LTV) limits, the loan size is determined by the income produced by the property being used as a holiday let.

If the deposit is not available from non-borrowed sources, such as investments or savings, then it may be possible to capital raise from equity available in other properties, such as a main residence or buy-to-let properties.

Significant tax advantages you may be able to claim

Running a furnished holiday let has some significant tax advantages. You may be able to claim Capital Gains Tax reliefs for Traders (Business Asset Rollover Relief, Entrepreneurs’ Relief) and may be entitled to Capital Allowances for items such as furniture, equipment and fixtures.

The profits are currently classified as earnings for pension purposes and currently, you can offset the full amount of interest, against rental, when calculating profits, providing HM Revenue & Customs (HMRC) conditions are met. The new treatment on buy to let finance costs does not apply to furnished holiday lets.

Strathon Park Financial Ltd will advise on the mortgage, but are unable to advise on tax or pensions- if you need advice in these areas, please consult a specialist.

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Call: 01937 837707
Email: info@strathonpark.co.uk
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