Buy-to-let mortgage: what are the options?

Many of our customers want to be able to let their owner-occupied home. For example, when they have bought a new home, and they want to keep the home they lived in before. But it may also be a home purchased specifically for letting. Normal residential mortgages stipulate that the home must be occupied by the owner; letting is not permitted. But there are now several providers offering buy-to-let mortgages (also referred to as investment mortgages). Buy-to-let mortgages are specifically for homes that are let or intended to be let, and you are not allowed to occupy it yourself.

In this article we set out some of the issues that are important in buy-to-let mortgages.

Equity

If your current home is worth more than the mortgage or it is mortgage free, there are a number of mortgage providers who will allow you to raise your mortgage up to the current market value of the home. You can use this amount to purchase a new home you intend to let, possibly in combination with a buy-to-let mortgage. Interest on a residential mortgage is usually lower than on a buy-to-let mortgage.

When do you qualify as a business or a professional?

There are no hard and fast rules for this. For most lenders you qualify as a business if you own 5 properties or more, or you present a plan for owning 5 properties in the next few years (with financial details showing that you have the means to fund this). If you already own property and the rental stream is €35,000 or higher and/or comprises more than 30% of your total income, this may also be a reason to qualify you as a professional.

Contributing your own capital

Most mortgage providers will only allow you to borrow up to 70% to 80% of the let market value. If the appraisal is low, let’s say 70% of the purchase price, you can borrow about 80% of 70%, that is to say 56% of the purchase price. That means that you have to bring in 44% plus the transfer tax (usually 2%), advisory costs, the costs of the civil-law notary, of the appraisal, the estate agent’s fee, etc.

Type of repayment

Almost all providers allow you to borrow 50% of the market value interest-only. The remainder must be repaid. In most cases this can be done either in level payments or straight-line. If you intend to finance multiple homes in the future, it makes sense to keep your monthly repayments as low as possible, because they will be taken into account in the assessment for your next mortgage. The best way to do this is to opt for an interest-only mortgage. In most cases you can repay 10% of the principal without penalty interest, even when you opt for an interest-only mortgage. Your Viisi adviser can discuss these conditions with you.

Lower borrowing capacity due to the mortgage top-up limit

You may have to deal with the mortgage top-up limit (in Dutch: Bijleenregeling). Let’s say you have built up some equity on your current home. However, you aren’t selling your current home, because you’re looking to rent out that property. Therefore, you will not be investing that equity/surplus value in your next home. This will remove your right to mortgage interest deduction over the part that is equal to that surplus value, which in turn also means that your borrowing capacity will be lower.

Calculation example of the mortgage top-up limit

Let’s suppose the surplus value on your old home is € 100,000. The mortgage on your new home is € 400,000. You will still get mortgage interest deduction over € 300,000, but no longer over € 100,000.