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As a Contractor, you might wonder if it will be more difficult to get a Buy to Let mortgage than if you were a salaried employee. The good news is that with a little research and planning, you should find it straightforward to find a suitable Buy to Let deal.
Overall, a Buy to Let mortgage is similar to a normal residential mortgage, in that it’s a loan to buy property which you pay back over the long term. Buy to Let mortgages are available from both high street lenders and specialist companies.
Borrowing on a Buy to Let is usually more expensive, however, as it’s a commercial loan. That’s because you’re aiming to make a profit from the rental income.
Mortgage interest rates are higher than with a residential loan, and you will usually need a significant deposit too. Around 25% is standard, but you might find lenders who accept less.
A Buy to Let mortgage for contractors is not a unique product – many lenders will happily accept a contractor as a customer. The focus is more on what you are looking for from the mortgage.
Perhaps the most important consideration as a potential landlord is about generating a good rental income from the property. You need to be certain you can attract tenants who pay enough rent to cover the mortgage. Your lender will ask for evidence that you can earn rent equalling 125% of the monthly mortgage payment.
You will also need to decide between an interest only and a repayment mortgage. Interest only is a popular choice among landlords: because monthly payments are lower, you make more profit on the rent.
The payments are lower because they only cover the interest on the debt – they don’t pay off any capital. You will therefore need to pay back the full mortgage value at the end of the term – and you should create a plan to achieve that.
On the other hand, a repayment mortgage has higher payments, but your tenants’ rent will mean you own the property outright at the end of the term.
For a lender, a Buy to Let mortgage is more about the rental income than the person taking out the mortgage. If your proposed rent easily covers the mortgage repayments – or you have a particularly big deposit – some lenders won’t be too concerned about your earnings.
Other lenders will take a look at your income, however. They will want to be certain you can pay the mortgage if there’s a gap between tenants. To assess your income, you might need to simply show details of your day rate, or perhaps supply recent tax records.
All lenders will check your credit score, to find out if you’ve had debt problems in the past. Previous financial issues and credit crunches can affect your ability to borrow.
Some landlords decide to set up limited companies to buy and manage their rental property. It depends on your personal situation whether this approach will benefit you.
Setting up a limited company is usually done for tax reasons, often when the landlord is a higher rate taxpayer. Because you pay tax on rental profits, on a higher tax rate you lose 40% to 45%. Meanwhile, through a limited company you pay corporation tax at 19%, which makes it a potential tax saver.
There are benefits and disadvantages to setting up a limited company, so it’s important to seek expert advice. You may already run a company for your contracting work – but you will usually need a property-specific business.
You will need to pay income tax through the annual self-assessment process if you earn between £2,500 and £9,999 from your rental property after ‘allowable expenses.’
‘Allowable expenses’ are costs connected to the property, like maintenance, repairs, insurance, letting agent fees and management fees.
It’s also important to note that if you sell your rental property, the funds you receive are subject to Capital Gains Tax.
Many Buy to Let mortgages are only available via Mortgage Brokers, and some are more open than others when it comes to lending to Contractors. Momentum has lots of experience in this area so we can help find the lenders who are likely to give you a positive mortgage offer.