How to guide: Buy-to-let Mortgages
As the rental market is going 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 mortgage lending…
Some people are looking for investment opportunities and some people are looking at alternatives to pensions to provide income into retirement. Whatever the reasons, 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 we have put together a handy guide to show you round the Buy-To-Let market.
Income & Expenditure
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 but then you would be paying interest on this extra amount. This is a point that it might be worth speaking to an Accountant about, as it could be offset against a potential tax liability when you eventually sell the property.
Property Renovations – Depending of the state of the property you may wish to renovate. 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.
Other costs to take into consideration are stamp duty, legal fees and a valuation fee.
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. 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. It 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 possible rent they believe 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 the 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. But 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 the tenants. An AST is the most common contract and lays out all the terms and conditions of your rental agreement with the tenants.
A letting agent will help you write out the AST and help guide you through 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 as well as via 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 Calculator
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 taken into consideration most lenders 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 instead 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 tenants 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.
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 will. As such, 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 two things you can guarantee in life… death and taxes! 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 accountant.
We hope you have found these tips useful and if you have any questions please do feel free to give us a call; we can put you in touch with our fee-free whole of market mortgage advisers. Being a landlord can be very rewarding but as with any investment there are risks so please do take care and seek professional advice as much as you can.
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.