Thursday 12 September 2013

Let to Buy UK:- An overview of the basics



A brief overview of the considerations


By Matthew Duncan Independent Financial Adviser

What is a Let to Buy?

A let to buy mortgage is when the new lender states they are happy for you to keep your existing
property and rent it out. Typically, the Lender will want to know the properties rental income will
cover the mortgage payments and If this is the case the lender will ignore the existing mortgage as a

Tax Efficiency

When you have a BTL mortgage or equivalent the property in essence becomes and investment.

You become labile for income tax on any profit you make.

Net profit is the difference between your rental income minus allowable expenses.

One of the allowable expenses is mortgage interest (Not any capital repayment element).

The Net profit is added to your employed income and taxed at that rate.

If you reduce the mortgage interest by paying off capital elements of the BTL mortgage you actually
reduce the allowable expense and therefore increase you tax liability. This is not an issue if you have
no other mortgages but if you do have a personal mortgage it is not very tax or risk efficient.

Equity for the next Purchase

If there is equity in your current property it may be worthwhile seeing if you can release some of it.
By releasing this equity you may be able to get a better rate on the new mortgage if the LTV is
reduced. Other key considerations are that by having a lower personal mortgage on the new property you are reducing your personal risk and by loading the BTL you are increasing the allowable expense for tax purposes therefore reducing your tax liability.

Return on Capital Employed

It must be remembered that the property that is being let will become an investment. It is therefore worthwhile looking at the maths to ensure the property is viable as an investment.

A property can return profit in two ways.

1.Capital growth

2.Return on capital

Return on capital looks at what capital has been employed and the return on this capital. For example if £30,000 has been used via equity or introduced (purchase) and the rental profit per year is £3,000 then the return on capital employed is 10%. 

BTL or Consent to Let

Depending on each lenders criteria and mortgage interest rates you may wish to consider changing
to an official BTL mortgage.

The other option is you ask your current provider for the consent to let. Typically they will change
you a fee for doing so and leave your mortgage on the same terms. Some lenders will increase your
interest rate to reflect you are renting it out.

Both types of mortgage are acceptable for future lenders if you are looking to Let to buy.