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Contractor Buy to Let mortgages and lenders

Finding the right Buy to Let mortgage as a contractor is generally a case of seeking expert advice. Many Buy to Let lenders don’t offer mortgages direct, so do talk to an experienced broker.

What are the features of a BTL mortgage?

A Buy to Let mortgage is generally like a normal residential mortgage: it’s a loan to buy property that you pay back over the long term. Buy to Let mortgages are available from both high street lenders and specialist companies. 

Generally Buy to Let fees and interest rates are a little more expensive as this type of lending is seen as commercial, where you aim to make a profit from the rental income.  You will usually need a significant deposit of at least 25%. 

What things should you consider when Buying to Let if you are a contractor?

Working as a contractor won’t have much impact on your ability to take out a Buy to Let mortgage. Most lenders are more interested in the rental income that the property will generate.

Because of that, you need to have done some good research on the rental market in your target area. You will need to attract tenants who will pay rent sufficient to cover the mortgage. Lenders will check that the rent exceeds 125% of your monthly mortgage payment.

You will also need to decide between an interest only and a repayment mortgage. Interest only is a popular choice for landlords. Because you are only paying the interest on the loan – not the capital itself, monthly payments are much lower. As a result, you make more profit on the rent. 

A repayment mortgage will have higher payments, but your tenants’ rent will eventually pay the property off so you own it outright at the end of the term. At the end of an interest only mortgage you will have to repay the amount you borrowed in full. 

Is it a good idea to Buy to Let through a Limited Company?

As a contractor, you may sit in the higher income tax bracket, which could mean you lose more of your rental profits in tax. 

Some landlords consider setting up a limited company to buy and manage their rental property. You should seek professional tax advice on whether this is the right approach for your specific situation. 

The benefit is that corporation tax is set at 19%, while as an individual on a higher tax rate you would pay 40% to 45% on your rental profits. Please note, that Corporation Tax increased to 25% in April 2023. This will be dependant on profits and whether it will effect you or not should be discussed with your Accountant or Tax Specialist

You may already run a company for your contracting work, but you will usually need a property-specific business. 

What is a Special Purpose Vehicle (SPV)?

An SPV is a limited company set up and registered in England purely to buy property. It means you are treated as a company for tax purposes, rather than as an individual. Most Buy to Let providers only lend to SPVs rather than other types of company.

The only income an SPV can receive is tenants’ rent. When thinking about how best to run your rental property, it’s important to make decisions at the start about whether to set up an SPV or operate as an individual. Changing that at a later date can mean mortgage fees and potentially Capital Gains Tax.

What is Top Slicing?

If your planned rental income falls a little short of the 125% required for a mortgage, Top Slicing is allowed by certain lenders to help you qualify for the mortgage. It allows you to use your contracting income to reach the target. 

This approach helps relieve the pressure to charge the maximum market rent – which also means it should be easier to attract tenants. 

How will your income be assessed as a contractor purchasing Buy to Let properties?

Provided you have the minimum deposit of 25% and the expected rental income is positive, some lenders will not be too concerned about your earnings. 

Certain lenders will take a look at your income, however. To assess your income, you might just need to show details of your daily rate on a current contract, or supply recent tax records. 

Lenders will also check your credit score, to see whether you’ve had debt problems in the past. Previous financial issues can affect your ability to borrow.

How can a Mortgage Broker Help?

The Buy to Let mortgage market can be complex, and every lender has their own specific criteria. Unlike a residential contractor mortgage, Buy to Let sits outside the UK regulatory regime.  Working with a good broker is the best way to ensure that you gain an appropriate mortgage offer, from a lender that will accept your specific situation as a contractor.

We will talk you through all the requirements of finding a rental property, getting a mortgage and the specifics of operating through an SPV if that’s the right approach for you. We’ll compare mortgage interest rates and fees to get you a suitable deal. 

For more details and advice, contact our registered office and we’ll set up an initial conversation.

Mortgages by Mcateer Ltd is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

Some buy to let mortgages are not regulated by the Financial Conduct Authority.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

Approved by The Openwork Partnership on 02/01/2024