If you need a landlord mortgage to buy a rental property, there are two ways to do this:
If you have sufficient equity in your home - you may be able to remortgage the house that you currently live in and use any profit made to purchase a second property. For example, if your house is worth £500,000 and your outstanding mortgage is £100,000, you'll have £400,000 equity in your home. You could then remortgage increasing your borrowing to £300,000. This would raise £200,000 which you could use to buy a second property to rent out.
If you don't have sufficient equity in your home – you will need a mortgage for the rental property. If you plan to rent out a residential property, you will need a buy-to-let mortgage and the amount you can borrow will usually be based on the potential rental income.
Landlord mortgages and other costs
As well as the mortgage repayments, you will also need to consider the various taxes and other costs that you might have to pay if you own a second home. These could include:
Council Tax – this has to be paid on most properties, but reductions of up to 50% may be available on second homes, at the discretion of the local council. As a landlord, you may be able to transfer council tax responsibility to your tenant, or use the rent to you receive to help you cover council tax costs.
- If you have a landlord mortgage, your rental income needs to be declared on your tax return. This income is added to any other income you have and is subject to income tax - the exact amount you pay will depend on your tax bracket.
Capital Gains Tax
- There are also tax implications when you sell a rental property
Capital Gains Tax on rental properties
Capital Gains Tax is a tax on the profit when you sell or give away something (an ‘asset’) that has increased in value. You are taxed on the gain you make, rather than on the amount received. You don’t usually have to pay Capital Gains Tax when you sell your own home as long as it’s been your only or main home for the whole time you’ve owned it. However, if you have a buy to let property which you then sell, any profits you make from the sale will be subject to capital gains tax.