Buy to Let Mortgage Guide
Until relatively recently people didn't tend to rent, they bought properties - flats and houses. The rental market shrunk because the legislation had been,for many years, in favour of the 'sitting' tenant. Landlords often could not get tenants out once they started living in a rented property.
These days it is possible for the landlord to force tenants to leave by taking them to court if they overstay an agreed period of time. These days tenants agree to a shorthold tenancy - often six months long. Renting out properties and investing in a 'buy-to-let' property are now the norm. A buy-to-let property is, in theory, self financing with the rent paying the mortgage raised on the property. Buy-to-lets have become one way for ordinary people with little capital to take a stake in the property market.
Rental has become popular because many young people cannot afford to buy their own properties until their 30s, and also workers are much more mobile now and move around the country. Attitudes generally towards renting are much more open and flexible, than for example, 20 years ago.
However, despite all the property TV programmes which show upbeat examples of buy-to-let investments, this type of let is not a easy bed of roses and can be hazardous, even distastrous, particularly if there is a property slump. Investors shouldn't look on buy-to-lets as a short term 'quick profit', they entail considerable commitment.
We all know there is no such thing as a free lunch - nor is there a hassle free buy-to-let. A buy-to-let is not an enterprise to be taken on lightly. Having said, buy-to-lets have been a massive growth phenomenum in the last 15 years. Personal finance magazine MoneyMarket says a study shows that buy-to-let investors now earn more than £15,000 a year from their private rental properties. Of course it has to be bourne in mind that most of this will probably go to paying the mortgage.
Buy- to -Let is a way to:
- Invest in property for income
- Invest in property for capital growth
- Diversify an investment
- Buy an investment for a son or daughter going to university.
This could prove a better bet than spending money on rent for 2-3 years. The tenants' rent would go towards the mortgage. The property might grow in value, but it could be hard to sell too!
What would be the size of the deposit I'd need for a Buy-to-Let property? The minimum deposit is usually 15%-20% of the purchase price. If you are a home owner, one easy way to raise this deposit is to remortgage or 'equity release' your main property.
Example Your property is worth £250,000 Your current mortgage £100,000 So the property's net worth £150,000 Buy -to- let property value £150,000 Deposit required – 20% which is £30,000
A mortgagor will loan £30,000 for an 'interest only' mortgage - in other words only the interest on the mortgage is paid back rather than the capital which would be repaid on the sale of the property. But the borrower must show they can make a minimum rental income, so that the loan interest payments can be repaid each month.
One of the big bad aspects of a buy-to-let is the dreaded vacant or void periods, either between one let and another, when the owner is simply unable to let the property, during a prolonged legal tussle with the current tenants. Too many buy-to-lets in an area can drive down the rent on, for example, a two bedroom flat. When working out the finances it is essential to assume a void - maybe 2 months in a year or more - and put aside enough cash to cover the mortgage.
It can make or break for a buy-to-let landlord if he or she chooses the wrong location or the wrong type of property for the investment, not to mention pays over the odds for it. The canny landlord gives a lot of thought to these aspects and if necessary will wait months for the right property to emerge.
A couple told us that they were considering buying a period building in Bristol as a buy- to- let and renting it out to students. The property was in reasonable condition, it was well placed near the university, it was inexpensive given its size, but they reluctantly didn't go ahead because the risk was too high. They did not have sufficient funds to keep paying for the mortgage during possible voids. They would have had to raise a bank loan at around 6% APR to meet their liabilities, and they couldn'd be sure how long it would take to find new tenants.
What does a Buy-to-Let mortgage cost? Although traditionally buy- to-let mortgage rates are higher than those offered on borrower's main properties, lenders are becoming more and more flexible. Either go to the lender direct or, if disatisfied, with the terms, look for a competitive mortgage broker. They may charge a fee - often 1% of the mortgage amount. Just as with a borrower's main property, beware of the unexpected extra costs to do with buying an investment property.
Furniture - often a furnished property will let more easily than an unfurnished one. A furnished property will require a fund to pay for for reasonable quality basics. Many buy-to-let landlords buy from Ikea and chuck furniture and bedding after five years.
Investment property upkeep - set up a fund for likely problems with plumbing, central heating, appliances.
A letting agency will charge 10% plus VAT of the rent to find a tenant and 15% plus to manage the property.
Insurance - it's vital to insure the building or a flat's portion of it, and take a view on contents insurance. Think about insuring for the loss of rental income, but it will eat into the profit. It is possible to insure against the cost of evicting non-rent paying tenants, but it's expensive.
Tax - If the value of someone's main residence increases, it will be free of Capital Gains Tax (CGT). If, however the worth of a rental property increases and is sold, you will be CGT liable. Currently an individual is allowed £7,500 CGT- free a year on investments like shares and an Indvidual Savings Account (ISA), but anything over that is taxed. Check with your accountant to ensure that your buy-to-let property project is tax efficient. Some of the buy-to-let maintenance costs and mortgage interest can be set against rental income.
Before deciding to buy an investment property, think about the following:
- If there was a slump in the rental market, could I cope financially if the rental income dipped or stopped altogether for a while?
- Am I prepared to take on the responsibilities of a landlord?
- Have I looked at the pros and cons of investing in a buy-to-let property from every whichway? It is a considerable undertaking and could go wrong.
What about letting out your current property and buying a new one? This is often called a let- to- buy mortgage and allows homeowners to use their current property as an investment property to let out and then buy a new property in which to live.
One couple said to us that they rented out their home in Hackney, East London and moved with their three small children to rented accommodation in prettier Hertfordshire. They intend to buy in Herts eventually and finance the deal when sell their Hackney home.
Mortgage companies are now flexible in their approach to lending and mortgage rates for such deals are now often as competitive as ordinary residential mortgages. Just like with a buy-to-let mortgage, lenders will want to know that you can achieve sufficient rental income on the rental property. They will often look for rental income substantially in excess of the mortgage repayments - around 130 – 150%.
How can your mortgage adviser help? In theory a mortgage adviser can be invaluable in helping you get as much as possible out of your main property in terms of equity. This should make it easy to raise a deposit on the new property. If your income(s) are sufficient to cover both mortgages then an even more competitive deal can often be found.
The Association of Residential Letting Agents (www.arla.co.uk) provides tips and advice on what to look for when choosing a buy-to-let property. It offers advice for first time and experienced landlords.