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For the use of mortgage intermediaries & other professionals only

The Costs of Buy to Let

Naturally, your clients will want to have a full understanding of the costs associated with Buy to Let (BTL).

There are three main areas where costs arise:

Purchase costs

  • Deposit — typically, the maximum BTL mortgage is 75% LTV - so your client will need to fund at least a quarter of the property value
  • Arrangement fee — could be up to 3.5% of the amount borrowed. This can usually be added to the loan, in which case interest will be charged on it.
  • Other costs — such as legal fees, stamp duty (if appropriate), and a survey fee

Mortgage costs

Mortgage interest payments are usually the largest on-going cost. Most lenders want to satisfy themselves that the rental income will more than cover the monthly mortgage payments.

The monthly rental calculation must cover 125% of the mortgage interest at initial product pay rate or 125% of the mortgage interest at a notional / stress rate whichever is higher. See Notional / Stress rates. The notional rate is currently 5.5% except for 5year fixed rate products where the notional rate is 5.25%. The notional rate for all further advance applications and porting applications is currently 5.5%. For higher and additional rate tax payers, the calculation will be based on 125% of the rental cover after any additional tax liability has been taken into consideration. Use the rental income calculator to determine the maximum loan available.

This provides a safeguard against periods when the property isn't let, and helps landlords meet the property running costs.

Borrowers must also consider the tax implications of the rental income and seek independent tax advice if they are unsure how they will be affected.

Property running costs

These include:

  • Property maintenance — such as repairs and maintaining the safety of gas and electrical appliances
  • Landlords building and contents insurance
  • Service charges and ground rents — for leasehold properties
  • Letting agent charges — if applicable

Usually the tenant is responsible for other property-related costs such as council tax, TV licence fee and utilities. The tenancy agreement should set out who is responsible for each of these payments.

For the use of mortgage intermediaries & other professionals only

If you do not have professional experience, you should not rely on the information contained on this site. If you are a professional and you reproduce any part of the information contained on this site, to be used with or to advise private clients, you must ensure it conforms to the Financial Conduct Authority's advising and selling rules. These pages are for the use of those people who are resident and ordinarily resident in the UK and should not be regarded as an offer or invitation to sell Mortgage products in any jurisdiction other than the UK.

Birmingham Midshires is a division of Bank of Scotland plc. Registered in Scotland No. SC327000. Registered office; The Mound, Edinburgh, EH1 1YZ

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