Buy-to-Let Mortgage on a Second Property: Navigating Options and Challenges

Investing in property is an attractive route for generating passive income and long-term wealth. If you’re considering buying a second property, a buy-to-let mortgage is one of the most common ways to finance this purchase. Unlike a standard residential mortgage, which is used to buy a home you intend to live in, a buy-to-let mortgage is specifically designed for individuals or companies planning to rent out the property to tenants. This guide will cover the nuances of obtaining a buy-to-let mortgage on a second property, including considerations like adverse credit, portfolio landlord status, and unique property types, as well as regional differences between England and Scotland.

What is a Buy-to-Let Mortgage?

A buy-to-let (BTL) mortgage is designed to help landlords finance properties they plan to rent out to tenants. The application process for BTL mortgages differs from that of residential mortgages, as lenders typically assess the viability of the mortgage based on the expected rental income from the property, rather than the borrower’s personal income alone.

When buying a second property for investment purposes, a buy-to-let mortgage offers flexibility and is tailored to meet the requirements of landlords, whether they’re seasoned portfolio landlords or first-time investors. Some key features of a buy-to-let mortgage include:

Higher Interest Rates: Buy-to-let mortgages generally come with higher interest rates compared to residential mortgages.

Larger Deposits: Lenders often require a larger deposit for a buy-to-let mortgage—typically around 20% to 40% of the property’s value.

Rental Coverage: The expected rental income needs to cover a certain percentage of the mortgage payments, usually around 125% to 145%, which acts as a safety net for lenders.

Personal Name vs. Limited Company Buy-to-Let Mortgage

When purchasing a second property, landlords can choose to buy the property in their personal name or through a limited company. Each option has its advantages and drawbacks, largely depending on the investor’s financial situation and long-term goals.

Buy-to-Let Mortgage in a Personal Name

1. Simplicity: Many first-time and smaller-scale landlords opt to buy properties in their personal name because of the straightforward nature of personal buy-to-let mortgages. Lenders typically require less complex documentation and the process of obtaining a mortgage is often faster.
2. Lower Interest Rates: Personal buy-to-let mortgages generally offer lower interest rates than limited company mortgages, making them more affordable for many landlords. Additionally, there is often a greater choice of lenders willing to offer buy-to-let mortgages to individuals than to limited companies.
3. Income Tax on Rental Income: One significant drawback of owning a buy-to-let property in your personal name is the tax treatment of rental income. Any rental income earned is added to your overall income and taxed according to your personal income tax bracket. High-income earners could find themselves paying up to 45% in tax on rental income.
4. Mortgage Interest Relief: Changes introduced by the UK government in 2020 limited the amount of tax relief individual landlords could claim on mortgage interest. This change means landlords can now only claim a basic rate of 20% tax relief on mortgage interest, which can significantly affect the profitability of a buy-to-let investment for higher earners.

Buy-to-Let Mortgage Through a Limited Company

1. Tax Efficiency: Limited company buy-to-let mortgages are attractive for higher-rate taxpayers. When the property is owned by a limited company, rental income is subject to corporation tax (currently at 19%, though set to rise), rather than personal income tax rates. Additionally, mortgage interest can be treated as a business expense, which is deductible for tax purposes.
2. Retained Earnings: If you’re planning to build a portfolio of rental properties, holding them through a limited company allows you to retain profits within the company and reinvest them without paying personal income tax. However, drawing income in the form of dividends will still incur personal taxes, but landlords have greater flexibility in controlling when and how they access profits.
3. Higher Interest Rates and Fees: The trade-off with limited company buy-to-let mortgages is the higher interest rates and fees, as well as the added complexity of managing a company, filing annual accounts, and dealing with corporation tax.

Buy-to-Let Mortgages with Adverse Credit

If you have adverse credit—such as a history of late payments, defaults, or County Court Judgments (CCJs)—securing a buy-to-let mortgage can be more challenging. However, options still exist, especially if you have a significant deposit or can show evidence of improved financial management.

1. Specialist Lenders: While mainstream lenders may be reluctant to offer buy-to-let mortgages to applicants with adverse credit, specialist lenders cater specifically to this market. These lenders may be more flexible in assessing applications and could be willing to offer loans based on the value of the property and expected rental income rather than focusing solely on credit history.
2. Higher Deposits and Interest Rates: To offset the risk associated with adverse credit, lenders may require a larger deposit (typically 25% to 40%) and charge higher interest rates. Nevertheless, a successful buy-to-let investment can help improve your credit rating over time, making future applications easier.
3. Portfolio Landlords and Adverse Credit: If you are a portfolio landlord (someone with four or more mortgaged properties), having adverse credit may require even more specialized mortgage products. Lenders will assess the health of your entire portfolio, and the performance of your other properties could affect your ability to secure financing for additional buy-to-let purchases.

Portfolio Landlords and Buy-to-Let Mortgages

For portfolio landlords, lenders apply stricter criteria when assessing buy-to-let mortgage applications. They don’t just evaluate the potential rental income of the property being purchased; they also assess the overall performance and sustainability of the entire portfolio. This additional scrutiny ensures that landlords with multiple properties are not over-leveraging themselves and that they can handle fluctuations in rental income across their portfolio.

1. Stress Testing: Lenders often apply stricter stress tests to portfolio landlords to ensure that rental income is sufficient to cover all mortgage payments across the entire portfolio, not just the new purchase. This stress test typically requires rental income to cover between 125% and 145% of mortgage payments, with some lenders also stress testing against higher theoretical interest rates to account for future rate hikes.
2. Portfolio Management: For portfolio landlords looking to buy a second or additional properties, owning the properties through a limited company can be beneficial, as it allows for more efficient tax planning and reinvestment of profits within the company.

Buy-to-Let Mortgages for Specialist Construction and Leasehold Properties

When purchasing properties of non-standard construction or leasehold properties, securing a buy-to-let mortgage can be more complex. Lenders are generally more cautious about these types of properties, as they often come with additional risks.

1. Specialist Construction: Non-standard construction refers to properties built with materials outside the typical brick or concrete structure. Examples include timber frames, steel frames, and concrete panels. Lenders may perceive these properties as higher risk due to potential maintenance issues or difficulties in selling them, and some lenders may outright refuse to offer mortgages for such properties. Specialist lenders, however, can often provide bespoke financing solutions for non-standard construction properties.
2. Leasehold Properties: Leasehold properties are common in England and Wales, particularly for flats. When purchasing a leasehold property, lenders will require the lease to have a minimum number of years remaining, often between 85 and 90 years. If the lease is too short, securing a mortgage can be difficult or impossible. Extending the lease before applying for a mortgage is often necessary, but this can come at a significant cost. Additionally, lenders may be cautious about properties with high ground rent or service charges, as these could impact the property’s profitability.
3. England vs. Scotland: In Scotland, most properties are sold as freehold (or under the Scottish equivalent of outright ownership), meaning there are fewer complications with leaseholds. However, Scotland operates under a different legal system, so landlords must be aware of variations in property law and regulations between the two regions.

No Minimum Income Requirement for Buy-to-Let Mortgages

One unique feature of buy-to-let mortgages is that some lenders do not require a minimum personal income, as the mortgage is primarily secured against the rental income of the property rather than the applicant’s earnings. This can be advantageous for individuals whose primary income comes from other sources, such as property investment or retirement savings.

However, lenders will still perform affordability assessments and want to ensure that you can cover any periods where the property may be vacant or rental income is disrupted. Therefore, having a strong rental yield and solid financial reserves is essential, particularly for first-time landlords or those without a traditional income source.

Buy-to-Let Mortgages in England and Scotland

While the general principles of buy-to-let mortgages are consistent across the UK, there are regional differences between England and Scotland.

1. Legal Process: In Scotland, the conveyancing process is different from that in England. Once an offer is accepted in Scotland, it is legally binding, unlike in England, where the sale is not legally binding until contracts are exchanged. This means that buyers in Scotland need to be fully prepared with their finances and legal representation before making an offer.
2. Rental Market Regulation: Scotland has more stringent rental market regulations than England. For example, Scotland operates under the Private Residential Tenancy (PRT) system, which offers tenants greater protection and more flexibility in terminating tenancies. Landlords in Scotland need to be aware of these regulations and ensure compliance when purchasing a buy-to-let property.

Conclusion

A buy-to-let mortgage on a second property offers excellent potential for generating passive income and growing your property portfolio. Whether you choose to purchase in your