What is a buy-to-let?

A buy-to-let is a residential property bought for the purpose of letting to tenants. In recent years buy-to-let ownership has moved from an asset class, to an actual business model.

Landlords benefit from rental profits and capital appreciation over time. Time being the crucial denominator!

How do buy-to-let mortgages work?

Buy-to-let mortgages are designed for property investors to invest in UK property, with the aim of making a profit each month via rental fees from their tenants.

Finding a buy-to-let mortgage used to be quite the challenge for buyers, with only a few specialist lenders offering them.

Thankfully, as the market grew over the years, more and more high street banks wanted to get a slice of the pie.

Nowadays, when it comes to lenders offering BTL mortgage options, you’re spoilt for choice!

As with all mortgage lending, meeting lender criteria and obtaining a deal is a challenge.

If you’re a portfolio landlord – an investor with four or more mortgaged properties in your portfolio – the challenge is even tougher.

Due to regulations introduced in 2017, mortgage lenders now have to check affordability across your whole situation; not just assessing the property you’re looking to purchase, but also the aggregate mortgage debt owed on the rest of your portfolio.

If you don’t match up with typical buy-to-let mortgage criteria, all is not lost; there are still several lenders out there who prioritise logical decision-making and lender feasibility over strict adherence to black and white rules.

Has mortgage interest tax relief changed?

This is where things get tricky. In 2017, our wonderful government introduced Section 24 changes. Mortgage interest tax relief for buy-to-let investors, as of April 2020, is now a thing of the past.

You can no longer deduct your mortgage interest from your personal buy-to-let taxable profits. As you can imagine it’s had a devastating effect on landlords’ profits across the country.

Now even though buy-to-let mortgage rates are currently low, the taxes are so high that the amount of retained profit – the cash in your pocket after expenses and tax – is much lower than it was before. It’s not all bad news though.

The tax relief has been replaced with a 20% tax credit. Great for basic-rate taxpayers; not so much for higher-rate and additional rate taxpayers.

Not a great situation overall; but thankfully, there is a solution…

Special purpose vehicle (SPV) buy-to-let limited company mortgages

It’s a mouthful, that’s for sure!

But don’t let the name fool you; it’s actually very simple. A limited company buy-to-let mortgage (otherwise known as a special purpose vehicle (SPV) buy-to-let mortgage) is a mortgage which is held within a limited company.

Instead of you personally owning the buy-to-let you’re looking to purchase, you incorporate it. The limited company is set up purely to own and manage the property on your behalf.

Effectively, you will own A property business for the purpose of offering private accommodation to your tenants. Specialist limited company buy-to-let lenders have said over 50% of portfolio landlords will be purchasing their next property through an SPV moving forwards – and the numbers continue to climb.

Here’s why…

If you’re a higher rate taxpayer, additional rate taxpayer or existing business owner, the benefits of owning buy-to-let properties through a limited company can outweigh the merits of owning buy-to-lets in your own name.

Firstly, 100% of the mortgage interest can be deducted as a legitimate business expense.

In fact, there are lots of expenses which can be deducted; including letting expenses, maintenance expenses utilities bills and buildings insurance costs.

And instead of paying income tax on your rental profits (which is charged at 20%, 40% or 45% depending on how much you earn), you’ll instead pay corporation tax which stays at 19% – no matter how much you make from the property.

Plus, if you leave the retained profits within the business, they won’t be taxed further.

Please seek independent tax advice before moving forwards with a buy-to-let property investment.

What are the other benefits of limited company buy-to-lets?

Transferring your personally-held property investments to your children will often incur inheritance tax and stamp duty.

You can sidestep these costs by purchasing through a limited company and transferring your shares across to them at zero cost.

If you’re a business owner, a limited company also offers a great route to growing your retained earnings.

By loaning your profits to the new limited company, you can invest them in buy-to-let property and earn a great return on your retained earnings.

And as for the aforementioned buy-to-let stress tests imposed on portfolio landlords; some lenders will treat your personal portfolio and the limited company’s new portfolio separately

Essentially enabling you to invest in more properties while avoiding the stress tests completely.

Here’s all the buy-to-let mortgage calculators you would ever need;  View our by to let Calculators

Buy-to-let mortgage criteria

In short, it’s vast.

There are so many buy-to-let lenders – both on the high street and in the specialist field – each with slightly different criteria for considering your eligibility for a buy-to-let mortgage.

Some focus on what’s known as ‘prime customers’, while others will prioritise other types of borrowers; and then there are SPV limited company mortgage criteria, which is a whole other can of worms…

To offer some clarity on the situation, here’s what you’ll need to be considered a prime customer to many lenders across the market:

• Earnings of 25k and above: A high income is preferable, but not mandatory for some lenders who have no minimum income policies.
• A healthy credit report: Make sure you’ve not only achieved a good credit rating but that you’re maintaining it as well.
• Minimal debt: Avoid being highly leveraged with credit card bills, personal loans, hire purchase debt and the like.
• At least a 25% deposit: Higher deposits mean less risk to lenders, which can get you access to very competitive deals.
• Homeowner-occupier status: Living in a home you own (with or without an outstanding mortgage) will open more doors to more lenders but is not necessarily a requirement.

The list is by no means exhaustive.

Even if you don’t match up to lenders’ criteria, all is not lost; a good mortgage broker will often be able to use their contacts to give you access to better mortgage options.

At SPV Mortgages, we’ve worked with many clients who fell short of lenders’ criteria and helped secure great mortgage deals on their behalf – get in touch to see how we can help you!

What is a portfolio landlord?

A portfolio landlord is an individual who owns 4 or more buy-to-let properties.
This definition comes straight from the PRA (aka the Prudential Regulation Authority) – the Bank of England’s supervisory and regulatory body of banks, building societies and other financial services firms across the country.

In September of 2016, the PRA launched new guidelines for underwriting buy-to-let mortgage contracts.

Effectively, these guidelines made it more difficult for portfolio landlords to acquire further properties, by limiting their access to buy-to-let mortgage lending.

If you’re a portfolio landlord looking to add another property to your roster, you must first pass lenders’ portfolio stress tests.

Here, lenders will consider your entire aggregate mortgage debt across all your mortgaged properties when deciding whether they can afford to lend to you.

In addition, some lenders have capped the number of buy-to-lets an individual can own; anyone over a lender’s maximum number will not be accepted for a loan with that lender.

This number differs depending on the lender. Some will limit you to three buy-to-let mortgages, others will allow you up to ten, and there are even some lenders who’ll allow more depending on the ownership structure of your buy-to-lets; in other words, whether your properties are owned personally or through an SPV.

The silver lining is, portfolio rental stress tests are not impossible to pass. Take a look at our bonus feature for strategies on choosing lenders and beating the portfolio landlord rules.

How many buy-to-let mortgages can I have?

Great question.

The exact number is hard to define; since it all comes down to individual lender criteria, lender relationships and your own personal circumstances.

For example, someone who earns 150k but is highly leveraged with loans, credit cards and a residential mortgage is far less likely to be eligible for the same number of mortgages as someone who earns 75k, has no personal debt and a reasonable sized residential mortgage.

As we covered with portfolio landlords, lenders may have limits on the number of buy-to-let mortgages you can get.

Some will consider all the mortgages you hold – both those held internally with the lender in question and those held externally with other lenders – while others will only have limits on the mortgages you hold with them alone.

In the latter case, most of these lenders won’t restrict the number of mortgages you can own but will limit the total amount of money they can lend to you.

These limits can range from £1.5 million all the way up to £3 million, depending on the lender.

Plus, on rare occasions, some lenders will allow borrowers to go beyond these limits. If you’re the right client with the right property, you may be in with a shot.

Is it illegal to rent out a property without a BTL mortgage?