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Guide to buy to let
Becoming a private landlord should not be seen as an easy way of making money. It can be riskier and more complicated. It can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will rise. That said, having a second property to let to tenants could reap considerable financial rewards over time.
There are 3 main differences in buy to let mortgages:
- Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not ever considered.
- Interest Rate - buy to let mortgages have slightly higher interest rates.
- Larger Deposit - typically a minimum of 20% or 25% of the property’s value is required as a deposit.
When buying a second property to let, you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property if it increases in value over time? The decision may affect the type of property you purchase, and the location.
When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 135% of the rental property’s interest only mortgage repayments in order to cover your costs should anything go wrong.
These additional costs include:
- Property upkeep - maintenance costs for the property.
- Letting agent’s fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
- Ground rent / service charges - applicable to leasehold properties.
- Legal insurance – to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
- Insurance - building insurance and contents insurance for the items provided as part of the rental agreement.
- Furnishings - the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
- Gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
- Decorating costs - the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
When choosing a property to let, it is wise to take advice from local letting agents to determine; what types of properties are in need and which parts of the town are best or most wanted. They can tell you if there is a University in the town, and if students are looking for somewhere to live.
What mortgages are available for landlords?
If you are buying a property to rent it out, or looking to remortgage an investment property, you won’t be able to get a standard residential mortgage. Instead, you’ll need a buy-to-let loan.
The amount you can borrow will depend on the rental income rather than your salary and the size of the deposit you can raise is even more crucial.
This is particularly important, given that competition in the buy-to-let market has dwindled, along with new lending, since the onset of the credit crunch.
Many of the largest buy-to-let lenders of recent years have merged or become state-owned as a result of the crisis, and only those with large deposits are likely to qualify for the best deals. For example, all the table-topping deals available when this guide was written require a deposit of at least 40%.
Are there different types of buy-to-let mortgages?
While the number of buy-to-let mortgage deals has shrunk over the past two years, there are still a number of different options available. As with standard residential mortgages, you can choose from fixed or variable rate deals and the terms of the products vary.
Many landlords prefer fixed rate loans rather than trackers or discounts: because your rental income is fixed, setting your mortgage payments gives peace of mind and protection against possible interest rate rises.
What else do I need to consider?
As mentioned above, buy-to-let lenders take your expected rental income into account when deciding how much you can borrow: in most cases they will want it to be at least 125% of the monthly mortgage payments. For example, if your mortgage is £500 per month, you would need to earn at least £625 a month in rent.
Don’t forget the arrangement fees. The set-up costs on buy-to-let mortgages tend to be significantly higher than those on residential home loans. Many lenders now charge a percentage fee, rather than a flat charge, on their buy-to-let mortgages and fees in excess of 1.5% of the loan size are not uncommon. It can therefore cost thousands just to take out a buy-to-let mortgage so it is important not to overlook this expense.