Can I Change My Mortgage to Buy-to-Let?

Converting your existing residential mortgage to a buy-to-let mortgage is a significant decision that can help you unlock rental income and turn your property into a profitable asset. If you're thinking about renting out your property or making a move into property investment, understanding the process of changing your mortgage is crucial. So, can you change your mortgage to buy-to-let? The short answer is yes, but there are necessary steps and considerations along the way.

In this guide, we will walk you through everything you need to know about converting your mortgage, from understanding what buy-to-let mortgages are to the steps you need to take, the costs involved, and the potential tax implications. By the end of this guide, you'll have a clear understanding of whether changing your mortgage to buy-to-let is the right move for you.

What Does it Mean to Change a Mortgage to Buy-to-Let?

Changing your mortgage from residential to buy-to-let means converting your existing home loan into a loan that is specifically designed for properties you intend to rent out. A buy-to-let mortgage differs from a residential mortgage because it is structured for investment properties that generate rental income. The key differences are:

• Interest Rates: Buy-to-let mortgages tend to have higher interest rates than residential ones due to the increased risk for lenders.

• Repayment Terms: Buy-to-let mortgages are usually offered as interest-only mortgages, which means you only pay the interest each month and not the principal, unless you choose otherwise.

The process of converting a residential mortgage to buy-to-let usually involves getting consent from your current lender or remortgaging to a new buy-to-let product. The lender will assess whether your property is suitable for rental purposes and if you meet the necessary financial criteria.

Can I Change My Mortgage to Buy-to-Let?

Yes, it is possible to change your mortgage to buy-to-let, but it requires specific steps and approvals. The first thing to note is that you need lender consent. If you're staying with your current mortgage lender, you must ask them for permission to rent out your property. Some lenders may allow you to switch your residential mortgage to a buy-to-let mortgage, while others may require you to remortgage with a different lender who specialises in buy-to-let loans.

Lenders typically want to ensure that your property meets specific criteria for rental purposes. They will also assess whether the rental income will cover the mortgage payments and any associated costs. If you meet these criteria, your lender will approve the switch to a buy-to-let mortgage.

Why Would You Want to Change Your Mortgage to Buy-to-Let?

There are several reasons why homeowners choose to change their mortgage to buy-to-let:

• Rental Income: Renting your property can provide a steady stream of income.

• Investment Opportunity: By converting your home into a rental property, you can benefit from potential property value appreciation over time.

• Diversification: If you're looking to diversify your investment portfolio, property is a tangible and potentially profitable option.

• Housing Market Fluctuations: In some cases, people choose to rent out their home rather than sell it when property prices are low, with the plan to sell at a later time when prices are higher.

However, while there are clear benefits, it’s essential to weigh the challenges, including the potential for void periods (when the property is not rented), tenant management, and higher costs associated with remortgaging.

Key Steps to Change Your Mortgage to Buy-to-Let

Step 1: Get Lender Consent

The first step in converting your mortgage to buy-to-let is obtaining lender consent. Consent to let is a temporary agreement that allows you to rent out your property under your current residential mortgage. However, if you're planning on making a long-term switch to renting out your property, you’ll need to move to a buy-to-let mortgage.

What is Consent to Let?

Consent to let is a permission granted by your lender that allows you to rent out your home while maintaining your residential mortgage. This is usually a short-term arrangement and doesn’t permanently change your mortgage agreement. It’s typically used for people who need to rent out their property temporarily, perhaps due to personal reasons, a job relocation, or a delay in selling.

Do You Need Consent from Your Mortgage Lender?

Yes, if you're planning to rent out your home, you must obtain your lender's consent before proceeding. Renting out your property without lender approval could violate your mortgage agreement, potentially leading to legal or financial consequences. Additionally, without consent, your insurance might not cover potential damages, and you could face penalty fees or a demand to repay the mortgage in full.

Is Consent Difficult to Obtain?

In most cases, obtaining consent to let is relatively straightforward, but it’s entirely at the lender’s discretion. The lender will assess your financial situation and the property’s suitability for rental. Some lenders may be more flexible and grant consent easily, while others may impose additional conditions, such as a higher interest rate or specific rental-income requirements.

Some lenders charge a fee for consent to let, which is usually a small one-off charge. If you're unsure about whether consent is likely to be granted, it’s advisable to speak with your lender or mortgage advisor before making any decisions.

Step 2: Understand the Affordability Criteria

Once you’ve obtained consent to let, the next step is ensuring that your finances meet the criteria set by your lender. Buy-to-let mortgages are based on different affordability criteria than residential mortgages, and understanding these criteria will ensure your application is successful.

How Much Rent Do You Need for a Buy-to-Let Mortgage?

For buy-to-let mortgages, lenders require that the rent you can charge covers more than just the monthly mortgage payment. Typically, they want the rental income to cover at least 125%-145% of your monthly mortgage payment. This is known as the rental coverage ratio, and it ensures that your property generates enough income to cover your loan repayments, including any potential void periods (where the property is not rented).

The rent you charge must be realistic and in line with the local rental market. Lenders often use rent-to-income ratios and will assess whether your property is likely to attract the required rental income based on its location, size, and condition.

How Much Equity Do You Need?

Most buy-to-let mortgages require a minimum deposit of 25% of the property’s value, meaning you’ll need at least 25% equity in the property. This is because buy-to-let mortgages are higher risk for lenders, and they need to ensure there’s enough security in the property in case of default.

For example, if your property is valued at £200,000, you would need a minimum of £50,000 as a deposit. The higher your deposit, the more favourable your mortgage terms are likely to be, as this reduces the lender’s risk.

Loan-to-Value (LTV) Requirements

The Loan-to-Value (LTV) ratio is a critical factor in determining how much you can borrow. For buy-to-let mortgages, the LTV is typically lower than for residential mortgages. While residential mortgages might offer LTVs of up to 90%, buy-to-let mortgages normally provide LTVs for around 75% or less.

For example, if you have a property valued at £250,000 and a £50,000 deposit, your LTV would be 80%, meaning you can borrow £200,000. The lower the LTV, the better the terms you’ll generally receive.

Step 3: Choose the Right Buy-to-Let Mortgage

Once you’ve obtained lender consent or have remortgaged, the next step is to choose the right buy-to-let mortgage product. There are several options available, each with its own advantages and disadvantages, depending on your financial situation and long-term plans.

What Types of Buy-to-Let Mortgages Are Available?

1. Interest-Only Mortgages: These mortgages allow you to pay only the interest on your loan each month, not the principal. This keeps your monthly payments lower, but the entire loan balance will still need to be repaid at the end of the term. This is the most common type of buy-to-let mortgage.

2. Repayment Mortgages: With repayment mortgages, you pay both the interest and a portion of the loan principal each month. This ensures the loan is fully paid off by the end of the term, but the monthly payments are usually higher than interest-only mortgages.

3. Fixed-Rate Mortgages: Fixed-rate mortgages offer a set interest rate for a specified period, usually 2 to 5 years. This provides stability and helps you budget effectively. However, once the fixed period ends, the rate will revert to the lender’s standard variable rate (SVR).

4. Tracker Mortgages: These mortgages track the Bank of England base rate, meaning your interest rate can rise or fall depending on economic conditions. While tracker mortgages can offer savings when rates are low, they come with the risk of increased payments if interest rates rise.

Interest Rates for Buy-to-Let Mortgages

Buy-to-let mortgages generally have higher interest rates than residential mortgages. Lenders see buy-to-let properties as riskier, especially when the rental income may fluctuate. Interest rates vary depending on the lender, the amount of equity in the property, and the length of the mortgage term. It’s essential to compare deals from various lenders to find the best interest rate and terms that suit your needs.

Step 4: Remortgage or Obtain a New Buy-to-Let Loan

In many cases, you’ll need to remortgage your property to convert it into a buy-to-let investment. Remortgaging involves replacing your existing mortgage with a new one that better suits your landlord needs.

What’s the Cost of Remortgaging?

Remortgaging to a buy-to-let mortgage usually involves several fees, including:

• Valuation Fees: A valuation of your property will be required to determine its current market value. Fees can vary based on the property value and lender.

• Legal Fees: Some lenders cover legal fees as part of the deal, while others will charge you for legal services.

• Early Repayment Charges (ERC): If you’re remortgaging before the end of your existing mortgage term, your current lender may charge you an early repayment fee. These fees can be substantial, so it's important to factor them into your financial planning.

How Much Does It Cost to Change from Residential to Buy-to-Let?

Aside from remortgaging fees, other costs include arranging a new mortgage (broker and application fees), property inspections, and possibly upgrading your property to meet landlord requirements. However, despite the initial costs, converting your property to buy-to-let could provide a steady income stream in the long run, making it a valuable investment.

Additional Considerations When Changing Your Mortgage to Buy-to-Let

When you switch your mortgage to buy-to-let, there are significant tax implications that you should be aware of. These include changes to how rental income is taxed, how mortgage interest is treated, and potential capital gains taxes when you sell the property.

Mortgage Interest Tax Relief for Landlords

One of the significant advantages of switching to a buy-to-let mortgage is that the interest you pay on the loan is tax-deductible. This means that you can subtract your mortgage interest payments from your rental income when calculating your taxable profits.

However, the rules around mortgage interest relief have changed in recent years. Since 2020, landlords have been unable to deduct the full amount of mortgage interest from their rental income. Instead, the UK government offers a tax credit of 20% of the mortgage interest paid. For example, if you pay £10,000 in interest on your buy-to-let mortgage, you can receive a tax credit of £2,000.

While this change reduces the amount of tax relief available to landlords, it still helps offset some of the costs associated with managing a rental property.

Capital Gains Tax (CGT)

Capital Gains Tax (CGT) applies when you sell a property and make a profit. If you sell your buy-to-let property for more than you paid for it, you will likely need to pay CGT on the profit. However, CGT doesn’t apply if the property is your primary residence, as you qualify for the Private Residence Relief.

When it comes to buy-to-let properties, CGT can be a high cost, particularly if the property has appreciated considerably in value. There are exemptions and reliefs available to reduce the tax, such as Letting Relief (if you lived in the property during part of the ownership period) and the Annual Exempt Amount, which allows you to make a certain amount of profit tax-free.

Income Tax on Rental Earnings

In addition to mortgage interest tax relief, you will also need to pay income tax on the rental income you earn. The rate at which you are taxed depends on your total income, including your rental income. The rental income is added to your other sources of income (such as salary or savings), and you will be taxed based on your total taxable income.

You can claim tax relief on various expenses, including mortgage interest, maintenance, repairs, insurance, and property management fees, which can reduce your overall tax liability.

Can You Live in Your Buy-to-Let Property?

Once your property has been converted to a buy-to-let investment, you cannot live in it unless you get permission from your lender. Living in a buy-to-let property could cause complications with your mortgage terms and affect the property’s classification.

Living in a Buy-to-Let Property

If you choose to live in a property that is under a buy-to-let mortgage, it might violate the terms of the mortgage agreement. Buy-to-let mortgages are specifically designed for rental properties, and lenders expect the property to be let out to tenants. If you live in the property, your lender could classify the mortgage as a residential mortgage and may require you to pay the outstanding loan in full or face penalties.

In some cases, you can switch your mortgage back to a residential mortgage if your circumstances change. However, this could involve further administrative work and costs.

Suppose you plan to live in the property after renting it out. In that case, you will need to discuss this with your lender and possibly explore switching back to a residential mortgage, which may offer different terms, such as a lower interest rate and less stringent rental income requirements.

How Long Does it Take to Change from a Residential Mortgage to Buy-to-Let?

The time it takes to convert your mortgage from residential to buy-to-let can vary. Typically, the process can take anywhere from 4 to 8 weeks, depending on several factors, including whether you are simply obtaining consent to let, remortgaging with your current lender, or switching to a new lender entirely.

Factors That Affect the Timeline

1. Lender Processing Time: Lenders vary in their processing times for reviewing and approving buy-to-let applications. The complexity of your financial situation and property type can also impact this.

2. Valuation and Surveys: Lenders often require a property valuation to ensure the property is suitable for buy-to-let. Depending on availability and survey complexity, this may take additional time.

3. Documentation: You’ll need to provide various documents, including proof of income, property details, and your current mortgage terms. Delays in submitting the necessary paperwork can extend the process.

It’s essential to plan and start the process early to ensure you meet your goals, especially if you are relying on rental income to make mortgage payments.

What Happens After Switching?

After successfully changing your mortgage to buy-to-let, there are several things you’ll need to manage to ensure the property runs smoothly and is compliant with all regulations.

Ongoing Management

Once you’ve converted your property to a buy-to-let, you’ll be responsible for managing the property and tenants. This includes ensuring the property is well-maintained, that tenants' rights are protected, and that all relevant safety checks (e.g., gas and fire safety) are conducted.

Insurance Considerations

It’s crucial to switch your home insurance to landlord insurance, as residential insurance will not cover rental properties. Landlord insurance typically includes coverage for property damage, loss of rental income, liability coverage, and tenant-related issues.

What Are the Key Risks of Changing Your Mortgage to Buy-to-Let?

While converting your mortgage to buy-to-let offers the opportunity to earn rental income and grow your investment, there are risks to be aware of:

• Rental Void Periods: If you can’t find tenants, you may have a period where you aren’t receiving rental income, but still have to pay the mortgage.

• Property Damage: With tenants in your property, there’s always the risk of damage to the property, which may not be covered by regular home insurance.

• Tax Implications: The tax rules for buy-to-let properties have become stricter, and failing to account for them properly could result in a higher tax liability.

• Market Fluctuations: Property values can go up or down, and volatile markets can affect your returns or make it harder to sell the property later.

Conclusion

Converting your mortgage to buy-to-let can be a smart move if you’re looking to generate rental income and potentially grow your property portfolio. However, there are several factors to consider, such as lender consent, affordability criteria, the tax implications, and your long-term financial goals. It’s essential to weigh the pros and cons and seek advice from a financial advisor or mortgage specialist to ensure that this decision aligns with your investment strategy.

At Property Store, we offer expert mortgage advice and property management tools to help guide you through the process of converting your mortgage and managing your buy-to-let properties. Our services are designed to make property investment more straightforward and more profitable.

For more information on buy-to-let mortgages, property tax implications, or any of our other services, feel free to contact us today.