Buy To Let – The Guide
As the rental market goes from strength to strength more people are looking to buy properties to rent out, and in most cases they will require a Buy-To-Let Mortgage.
We have asked our mortgage team to put together a handy guide to help explain what to look out for with this specialist type of investment.
Some people are looking for investment opportunities and some people are looking at alternatives to pensions to provide income into retirement but whatever the reason more and more people are turning to the UK housing market and buying a property to rent out. As with all investments there are always risks to consider so having an experienced adviser working on your behalf is key to minimizing these risks and maximizing the opportunities.
Buy-to-let mortgages are treated differently to residential mortgages by both the FCA and mortgage lenders. With complex criteria it is very difficult to navigate the market without the right tools and experience and getting it wrong could be very expensive.
Buy-To-Let is an easy concept to get to grips with, you own a property and you rent it out. But there are lots of factors to consider when weighing up if it is a good investment.
Deposit – In most cases you are going to need to obtain a mortgage to buy the property you wish to let. Typically you will need at least 25% of the purchase price as a deposit, some lenders may allow smaller deposits but they become much more expensive in terms of interest rates.
Arrangement Fee – As with most residential mortgages BTL mortgages can come with arrangement fees and they can be quite high, sometimes even as high as 3.5% of the mortgage!
These fees can be added to the mortgage but be aware you would be paying interest on this extra borrowing.
Property Renovations – Depending on the condition of the property you purchase you may need to take renovation costs into consideration. Bringing the décor up to date adds desirability to the property meaning you can demand a higher rent and also have shorter gaps between tenancies.
Property Maintenance – The cost of repairs and maintaining the property to the appropriate standard will be your responsibility and this should be kept in mind and you should always ensure that you have sufficient surplus funds to cover any occurrence.
Service Charge & Ground Rent – If your rental property is a flat or is leasehold there is likely to be a service charge and ground rent to pay. This is your responsibility to ensure it is paid, whether you charge the tenant for it or not.
Rental Income – This is the fun bit, your source of income will be via the monthly rent you charge. Before buying a property to let check with letting/estate agents what they believe the possible rent could be achieved.
What can a letting agent do for you?
If this is your first rental property, you have a portfolio of properties or live a considerable distance to the property you may consider it a good idea to get in touch with reputable Letting Agents to get a feel for their services and check that the services of an agent is going to meet your needs.
They generally charge around 10%-15% of the rental for their services and fixed upfront fees.
They can check potential tenants backgrounds, run references, compile inventory reports, collect rent and deposits on your behalf, prepare tenancy agreements and support in the general management and maintenance of the property as well as giving you expert advice.
Assured Shorthold Tenancy agreement (AST)
A tenancy agreement is simply a contract between you the landlord and tenants.
An AST is the most common contract and lays out all the terms and conditions of your rental agreement with the tenant’s.
A letting agent will help you write out the AST and also though the contract negotiation process but if you are going to let your property out without the help of an agent you can get standardised ASTs from book and stationary stores and around the internet.
This is a legally binding document so please do take care to make sure it is perfect.
We would advise you to seek professional help with this as it’s not worth the pain of getting it wrong.
Rental Income Calculations
When applying for Buy-To-Let mortgage the lenders are more interested in the rental income the property will receive rather than your actual earned income.
The general rule of thumb to work from is your rental needs to be 125% of your mortgage payment for example:
Mortgage Payment = £500 then the rental income will need to be £625.
Each lender has their own criteria but this is a good guide to work from.
Please Note – Even though your personal income isn’t the lenders main concern many do have a minimum earned income policy which is generally a salary of £20,000 to £25,000.
Let-to-buy is becoming ever more popular and accessible. This is where you currently own
a property and rather than selling it to raise funds to buy the next one you rent out your
current property and buy a new one.
This is generally done in 2 transactions but both at the same time;
You remortgage your current residential property onto a buy-to-let mortgage. If
you need to raise additional funds for a deposit on your new property here is the
place to do it.
You purchase a new residential property as you normally would.
Not all lenders allow this process to take place but your mortgage adviser will help weed out
those who won’t and advise you on the best way to do this.
Unfortunately the world isn’t quite perfect and things can go wrong. Landlords insurance is
a great way to protect yourself from any surprises.
You may have seen on TV or heard horror stories of disgruntled tenant’s wrecking properties
and refusing to move out, this is an unfortunate possible reality. Landlords insurance is
there to pick up the legal bill and the cost to put the property back in a good state of repair
should the worst happen. Each insurance policy is different so take care to ensure the
circumstances mentioned are covered.
Also in tougher times there may be gaps between tenants which means you now have a
second mortgage to pay, we would always recommend you have a personal savings pot to
protect yourself from this but Landlords insurance can also help with this burden.
Consent to let
If you currently own a property with a mortgage on a residential basis and you no longer
wish to live there but plan on moving out and renting it you have to obtain ‘Consent to let’
from your mortgage provider.
Most lenders will allow this to take place but not all so it is worth checking with them first. It
is very likely that if they do accept a consent to let to take place they will amend your interest
rate so you could end up paying a little more than you are now.
There are only to things you can guarantee in life… death and tax! When you take on the
investment of a buy-to-let property there are tax implications which you will need to manage,
most notably Income Tax and Capital Gains Tax, it is best to discuss these in detail with an
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of Fordyce & Playle Limited. All comments are made in good faith, and neither Fordyce & Playle Limited nor the author will accept liability for them. No advice is given in any posting. Please contact your Financial Adviser for more information or advice.