Buy-to-let mortgages for self-employed

The world of property investment can seem daunting, especially when you’re self-employed. One of the key aspects of this journey involves securing a mortgage that aligns with your unique financial circumstances. This is where “Buy to let mortgages for self-employed” come into play, offering tailored solutions that accommodate fluctuating incomes and distinct tax situations. 

A self-employed buy-to-let mortgage is specifically designed to facilitate the ambitious investment aspirations of those working for themselves. Whether you’re a freelancer, sole trader, or running a limited company, understanding the intricacies of such financial products is crucial to turning your property investment dreams into a rewarding reality. In this guide, we’ll delve into the key aspects of self-employed buy-to-let mortgages, arming you with the knowledge needed to make informed decisions on your property investment journey.

What is a self-employed buy to let mortgage?

A self-employed buy-to-let mortgage is a type of mortgage designed for self-employed individuals who want to buy property as an investment rather than as a residence. The intent is to rent out the property to tenants and earn income from the rental payments.
Getting a mortgage while self-employed can sometimes be challenging, as lenders often see self-employment as a higher risk compared to someone in full-time employment. This is because the income of self-employed individuals may fluctuate and is not as predictable.

To qualify for a self-employed buy-to-let mortgage, lenders typically require at least two years of trading history and proof of income, which can be shown through tax returns or certified accounts. Some lenders may also take into account the projected rental income from the property when deciding how much to lend. The exact requirements can vary from lender to lender.

It’s important to note that buy-to-let mortgages often come with higher interest rates and require a larger deposit than residential mortgages, and the fact of being self-employed can sometimes add to these costs.

Can I get a buy to let mortgage when self-employed?

Yes, you can get a buy-to-let mortgage if you’re self-employed. Many lenders offer buy-to-let mortgages specifically tailored for self-employed individuals. However, the requirements may be slightly more stringent compared to those for individuals with a regular salaried income. Here are a few key points to consider:

1. Proof of Income: Lenders generally ask for proof of income for the past two to three years. This can be in the form of tax returns, bank statements, or audited accounts. This helps to give lenders confidence in your ability to meet the monthly mortgage payments.

2. Trading History: In addition to showing proof of income, you may also need to show a consistent trading history. Lenders typically like to see that you’ve been successfully self-employed for at least two to three years.

3. Deposit: Lenders often require a larger deposit for buy-to-let mortgages compared to residential mortgages. This typically ranges from 20–40% of the property value, although it can be higher or lower depending on the lender’s policies and your financial situation.

4. Potential Rental Income: Many lenders will also consider the potential rental income from the property when deciding how much to lend. They will usually require that the rental income be 125–145% of the mortgage payment, although this can vary between lenders.

5. Credit History: As with any mortgage, a good credit history will improve your chances of approval and may help you to secure better interest rates.

How to get a BTL mortgage if you’re self-employed 

Getting a Buy-to-Let (BTL) mortgage while self-employed involves a similar process to getting a standard mortgage, though with a few additional steps and considerations. Here’s a basic guide on how to go about it:

Get Your Accounts in Order: Lenders will want to see proof of your income. They generally require at least two years’ worth of accounts or tax returns to establish your earnings history. Some lenders might require three years’ worth of documentation, especially if your income has significant fluctuations.

Hire an Accountant: Many lenders will demand to see accounts that a certified or chartered accountant has prepared. This adds validity to your accounts and makes it more likely that your mortgage application will be successful.

Check Your Credit Score: A good credit history is essential for any mortgage application. If your credit score is low, you may want to take steps to improve it before applying for a mortgage.

Save for a Deposit: Buy-to-let mortgages generally require a larger deposit than residential mortgages. You’ll typically need at least a 20–40% deposit, though this can vary by lender.

Calculate Your Potential Rental Income: Lenders will usually require the rental income from the property to be 125–145% of the mortgage payment. It’s important to do your research and provide a realistic rental income estimate. Some lenders may require a letter from a letting agent to confirm potential rental income.

Choose the Right Mortgage Product: There are different types of BTL mortgages, including interest-only and repayment options. Research these thoroughly or speak to a mortgage advisor to understand which is best for your circumstances.

Seek Professional Advice: It’s worth considering the use of a mortgage broker experienced in BTL mortgages for self-employed individuals. They will understand the market and be able to guide you to the lenders most likely to approve your application.

Apply for the Mortgage: Once you’ve got everything in order, you can then apply for the mortgage either directly through a lender or via a mortgage broker. Be prepared to provide all the necessary documentation promptly, as delays can slow down the application process.

How much deposit will I need?

In the United Kingdom, the deposit required for a buy-to-let mortgage is typically higher than that for a standard residential mortgage. You’ll generally need a deposit of around 25% to 40% of the property’s purchase price.
So, if you’re buying a property worth £200,000, you’ll need a deposit of between £50,000 and £80,000.

However, it’s important to note that these are average figures, and the precise amount can vary. Several factors can influence the size of the deposit you’ll need:

Lender’s Criteria: Each lender will have its own criteria and may require a higher or lower deposit based on their assessment of the risk involved.

Your Financial Circumstances: Lenders will take into account your credit history, income (even when self-employed), and any existing debts. If you have a strong credit score and steady income, you might be able to negotiate a lower deposit.

Property Type and Location: The type and location of the property can also affect the deposit requirement. For instance, if the property is seen as a higher risk, lenders might require a larger deposit.

Market Conditions: Current market conditions can also influence deposit requirements.

Current buy to let mortgage rates

The current average buy-to-let mortgage rates in the UK between 5.50 to 7.50%.

Please note that these rates can vary depending on your circumstances, such as your credit score, the value of the property, and the size of your deposit. It’s always a good idea to speak to a mortgage advisor or broker to get the most accurate information for your situation.

Available buy-to-let lenders

There are numerous lenders in the UK who offer buy-to-let mortgages. These include both high-street banks and specialist lenders. Here are some lenders who provide these services:

Barclays: Barclays offers a range of buy-to-let mortgages for UK properties. They have mortgages for both first-time landlords and experienced landlords.

Nationwide (through The Mortgage Works): The Mortgage Works is a subsidiary of Nationwide Building Society and specialises in buy-to-let mortgages for all types of landlords.

Santander: Santander provides buy-to-let mortgages for individuals or companies, including those new to property investment.

HSBC: HSBC provides buy-to-let mortgages for both small and large scale property investors.

NatWest: NatWest offers buy-to-let mortgages for landlords with a range of experience, from those just starting out to those with a large property portfolio.

Leeds Building Society: Leeds Building Society offers a variety of buy-to-let mortgages, including options for those who are self-employed.

Paragon: Paragon is a specialist lender offering buy-to-let mortgages for landlords, including those with more complex portfolios.

Coventry Building Society: Coventry Building Society has options for both new and experienced landlords, offering fixed and variable rate buy-to-let mortgages.

BM Solutions (part of Lloyds Banking Group): BM Solutions is a specialist lender of buy-to-let mortgages, offering a range of options for landlords.

Virgin Money: Virgin Money provides a range of buy-to-let mortgages with various term lengths and rate types.

How much can I borrow for a buy to let mortgage if I’m self-employed?

The amount you can borrow for a buy-to-let mortgage as a self-employed individual depends on several factors:

Income: Lenders will assess your personal income to determine how much you can afford to borrow. This is usually based on your net profit if you’re a sole trader, or salary plus dividends if you’re a director of a limited company. Some lenders may also take into account the profit retained within your business.

Projected Rental Income: For buy-to-let mortgages, the projected rental income from the property plays a crucial role. Lenders typically require the rental income to be 125%–145% of the mortgage payment.

Deposit: The more deposits you can put down, the more you might be able to borrow. Typical deposits for buy-to-let mortgages range from 25% to 40% of the property’s value.

Credit Score: A good credit history can influence how much lenders are willing to let you borrow.

Age: Some lenders have upper age limits at the end of the mortgage term, which may affect the amount you can borrow and over what period.

As a rough guide, lenders will often lend up to 4.5 times your income for a residential mortgage, but for a buy-to-let mortgage, the calculation is generally based more on the expected rental income than your income.

Remortgage a buy-to-let property 

Remortgaging a buy-to-let property is a process in which you change your current mortgage to a new deal, either with your existing lender or a different one. It is commonly done for reasons such as securing a better interest rate, releasing equity from the property, or changing the mortgage terms. Here’s a general step-by-step guide on how to go about it:

Review Your Current Mortgage: Before anything else, it’s important to understand the terms of your existing mortgage. Are there any early repayment charges if you switch before the end of your current deal? What is your current interest rate? When does your current deal end?

Decide What You Want From the Remortgage: Do you want to release equity from your property to invest in another buy-to-let property, make home improvements, or raise cash for another purpose? Are you looking to reduce your monthly payments by getting a better interest rate or extending the mortgage term? Or perhaps you want a more flexible mortgage that allows overpayments?

Research the Market: Look for the best deals on the market that suit your needs. You can do this yourself or use a mortgage broker who has access to a wider range of products and can advise you based on your specific circumstances.

Consider Property Value: Remember that the value of your property might have changed since you took out your original mortgage, which could affect your loan-to-value ratio (LTV) and the deals you’re eligible for.

Apply for the Remortgage: Once you’ve chosen a product, you’ll need to apply, which involves providing information about yourself, your income (or your rental income if it’s a buy-to-let remortgage), and your expenses.

Property Valuation: The new lender will carry out a property valuation to determine how much it’s worth and how much they’re willing to lend.

Legal Work: There’s also some legal work involved in remortgaging, to change the lender’s details on the property deeds. Some lenders offer ‘free legals’ with their remortgage deals, where they’ll cover the legal costs.

Completion: Once everything has been approved, you can agree on a completion date when your new mortgage starts and your old one ends.

Can a buy-to-let mortgage for a self-employed individual be converted into a residential mortgage?

It is typically possible to convert a buy-to-let mortgage into a residential mortgage, but the process can be complex and will depend on several factors. Here are the general steps involved:

Contact Your Lender: You’ll need to get in touch with your current lender to discuss your intentions. They’ll be able to tell you whether this is possible with your current mortgage.

Reapplication/Change of Terms: You’ll likely need to apply for the change, just as you would for a new mortgage. This is because the conditions for a residential mortgage (intended for you to live in) are different from those of a buy-to-let mortgage (intended to be rented out). As a part of this, your lender will reassess your financial situation. Since you’re self-employed, you’ll need to provide proof of your income, which typically involves at least two years’ worth of accounts or tax returns.

Affordability Assessment: Since the property will become your residence, lenders will conduct an affordability assessment. This is different from the process for buy-to-let mortgages, which usually focus on the potential rental income from the property. Instead, lenders will look at your income, outgoings, and other financial commitments to ensure you can afford the repayments.

Property Valuation: The lender may want to revalue the property to ensure it provides sufficient security for the loan.

Approval: If all conditions are met, the lender may approve the switch from a buy-to-let mortgage to a residential one.

It’s worth noting that switching from a buy-to-let mortgage to a residential mortgage could have tax implications, particularly if you’ve claimed tax relief on mortgage interest or other costs associated with the property. It’s advisable to speak with a financial advisor or tax specialist to fully understand the implications.

Also, not all lenders will allow this switch, so if your current lender doesn’t, you might have to look into remortgaging with a new lender. This can involve additional costs, such as early repayment charges on your existing mortgage and arrangement fees on the new one.

The reasons for a self-employed buy-to-let mortgage

The reasons for a self-employed individual to seek a buy-to-let mortgage often align with the reasons anyone else might do so. Some of the main motivations include:

Investment Opportunities: Property is often seen as a solid long-term investment. The value of the property may increase over time (capital appreciation), and in the meantime, it can generate rental income.

Diversification: A buy-to-let property can diversify a self-employed individual’s income streams. If they have a volatile income from their main business, having a steady rental income can add financial stability.

Retirement Planning: Some self-employed individuals use buy-to-let properties as a form of retirement planning. The property can provide a steady income stream in retirement, or be sold to release capital.

Potential Tax Benefits: Depending on the individual’s circumstances, there may be tax advantages associated with owning a buy-to-let property.

Business Expansion: In some cases, self-employed individuals might purchase a buy-to-let property to expand their business, particularly if they’re in the property or rental sector.

For self-employed individuals specifically, one of the challenges they face when applying for any type of mortgage is proving their income, as their earnings might fluctuate more than those of someone in regular employment. 

However, with a buy-to-let mortgage, lenders often focus more on the potential rental income from the property rather than the applicant’s personal income, which can make it somewhat easier for a self-employed person to get approved, provided the rental income is sufficient to cover the mortgage repayments and other costs.

First time landlords – do you turn a profit?

Becoming a landlord for the first time can certainly be profitable, but it’s not guaranteed, and it depends on various factors. Here are some considerations:

1. Rental Income vs. Costs: The most immediate source of profit for landlords is the rental income. After subtracting costs like mortgage payments, property taxes, insurance, maintenance costs, letting agency fees, and potential periods of vacancy, you would ideally have a positive cash flow, meaning your rental income exceeds your costs.

2. Property Value Appreciation: Over time, the value of the property may increase. When you eventually sell the property, you could make a profit if the selling price is higher than your purchase price. This is not guaranteed, however, as property values can also decrease due to various factors.

3. Tax Implications: Profitability can also depend on the tax implications of being a landlord. There are potential tax deductions available for landlords, such as interest on your buy-to-let mortgage and certain allowable expenses. However, rental income is also subject to taxation, and if you sell the property at a profit, you may need to pay Capital Gains Tax.

4. Market Factors: Local property market conditions and broader economic conditions can greatly influence profitability. Factors like local rental demand, employment rates, and interest rates can all play a role.

5. Property Management: How well the property is managed can also impact profitability. Good property management can lead to longer tenant tenancies, less damage to the property, and fewer periods of vacancy.

It’s also important to note that being a landlord is not just about making a profit. It’s a role that comes with responsibilities, including maintaining the property, ensuring the safety of your tenants, and complying with various legal obligations.

Can I change my mortgage to self-employed buy to let mortgage?

Changing your existing residential mortgage to a self-employed buy-to-let mortgage typically involves a few steps. This type of change is often referred to as “let-to-buy,” where you move out of your current home, rent it out, and buy a new home to live in. Here’s a general overview of the process:

Consent to Let: If you plan to let out your current home while still under an existing residential mortgage, you need to obtain “consent to let” from your current lender. Some lenders may agree to this for a certain period, although they may increase your interest rate or charge a fee.

Switching to a Buy-to-Let Mortgage: If you plan to let your property out for the longer term, you’ll typically need to switch to a buy-to-let mortgage. This usually involves applying for a new mortgage, and the lender will consider factors such as your income, credit history, and the potential rental income from the property.

Buying a New Residential Property: If you’re moving out of your current home to let it out and buying a new home to live in, you’ll need to apply for a new residential mortgage for the new property. The lender will assess your income, credit history, and other factors to determine whether you qualify. Being self-employed, you’ll typically need to provide at least two years’ worth of accounts or tax returns to prove your income.

Tax Considerations: Changing your residential mortgage to a buy-to-let mortgage can have tax implications. For example, the rental income you receive from the property will be subject to income tax. However, you may be able to deduct certain expenses related to letting out the property, such as mortgage interest and maintenance costs. If you later sell the property, you might also have to pay capital gains tax on the profit.

Before making these changes, it’s advisable to speak with a mortgage advisor and a tax advisor. They can guide you through the process and help you understand the financial and tax implications based on your specific situation.

Should I hire a mortgage broker to get buy-to-let mortgages for self-employed?

Hiring a mortgage broker to assist with obtaining a buy-to-let mortgage as a self-employed individual can be extremely beneficial. Here are a few reasons why:

1. 1. Understanding the Market: Mortgage brokers have a deep understanding of the mortgage market and can help navigate its complexities. This is especially helpful for self-employed individuals, as their circumstances can make the mortgage process more complicated.

1. 1. Access to a Range of Products: Brokers have access to a wide range of mortgage products, some of which may not be readily available to the public. They can help you find the best product for your needs.

1. 1. Saving Time: The process of obtaining a mortgage can be time-consuming, especially when you’re self-employed and need to gather various forms of documentation to verify your income. A broker can handle much of this legwork for you.

1. 1. Advice and Guidance: A mortgage broker can provide expert advice and guidance tailored to your specific needs. They can advise on the most suitable types of mortgages, help you understand how much you can borrow, and assist with the application process.

1. 1. Negotiating Deals: Brokers often have established relationships with lenders, which can help when negotiating interest rates and terms on your mortgage.

1. 1. Help with Applications: Application processes can be more complex for self-employed individuals. A broker can help ensure your application is as strong as possible, improving your chances of approval.

However, keep in mind that mortgage brokers do charge for their services, which may be a flat fee, a percentage of the mortgage amount, or a combination of both. Also, ensure that any broker you work with is properly regulated by the relevant financial services authority in your region (for example, the Financial Conduct Authority in the UK).

In summary, while hiring a mortgage broker comes with a cost, the benefits they provide, particularly for self-employed individuals seeking a buy-to-let mortgage – can far outweigh the expense. It’s always a good idea to thoroughly research and consider your options before making a decision.