What is a Buy-to-Let mortgage?
A Buy-to-Let mortgage is a loan used to purchase property which you
intend to rent out. The buy to let phenomenon has helped to drive up
house prices recently but at the same time has increased
considerably the quantity and quality of housing stock available to
rent.
What is different about a Buy-to-Let mortgage?
Before Buy-to-Let anyone borrowing to purchase a rental property had
to take out a commercial mortgage which had quite a bit higher rate
of interest than an ordinary domestic (owner occupier) mortgage.
Lenders viewed residential letting as higher risk, so the lender
paid more.
What the Buy-to-Let mortgage did was recognise that most residential lettings were not that much more of a risk than lending to owner occupiers, and that in fact many of these landlords represented a lower risk. There is a slight change of emphasis with Buy-to-Let in that the lending criteria focuses on the value of the property and the rental return expected rather than the income of the individual taking out the loan, though the individual's credit rating and letting experience is still important.
Typically the loan will be for a maximum of 80 to 85% of the value of a property with an expected rental income of 120 to 130% of the monthly re-payments and interest will be only slightly higher than a normal occupier mortgage. The mortgage may be interest only, repayment, fixed interest or variable rate just like any other mortgage and the term can be anywhere between 5 and 45 years.
I would like to become a Buy-to-Let landlord, how do I go
about it?
You need to think about (1) the letting market - you are buying to
let, not a property to live in so focus on your tenant's needs (2)
the type of property - often the smaller properties like one-bed
flats give the best returns (yields) (3) the location - you need
locations with amenities where people want to rent.
If there are lots of other properties that are let out, you can bet it's an area where there's demand for letting. (4) the type of tenant you are going to target - if your house is in Mayfair you are at the very top of the market and will be going for the big company lets or certainly the affluent renting set, the middle of the market where most people operate consists of professional or working people who are mobile and want the flexibility of renting to move with their jobs.
The bottom end of the market, students and Housing Benefit (HB) sometimes known as DSS tenants, and Houses in Multiple Occupation (HMOs) which now need a landlord's license, are more troublesome, need much more management time, are sometimes more risky in terms of damage and rent arrears, but can give a higher return if managed well.
What are the benefits of being a Buy-to-Let landlord?
People become landlords for various reasons: you inherit a property,
you move and retain your old home and let it, you move abroad for a
time or you simply want to become a property landlord etc. Many have
entered the field by accident but soon see the benefits: high income
return and, when the market is growing as it has recently, high
capital growth.
Some landlords have taken advantage of the rising market by re-mortgaging as the equity values of their properties have increased and invested the proceeds as deposits on more rental properties. This practice requires caution, especially as the market peaks and maybe even decline for a time. Whether you build a big portfolio or just take the income and growth from one or two rental properties, being a landlord is a great way to provide a good steady income, perhaps to provide school fees or holidays, and also a growing asset for your future pension.
The Victorians and Edwardians knew the value of property investment - A man of Property and a Woman of Taste - now it's increasingly possible in a relatively affluent age for the ordinary guy to have these benefits! However, you should not see Buy-to-Let as a get-rich-quick scheme.
With property, you are buying an asset with "low liquidity" which
means you cannot get your cash back quickly. Investing in rental
property may make sense when it's part of a broad investment
portfolio. You should seek independent financial advice about
buy-to-let property and how it would fit into your investment
scheme.
What return can I get from my property?
Returns vary depending on the market as a whole, the letting market
where the property is located and the type of property letting you
are dealing with. Some lettings will provide enough income to clear
all costs - your running expenses and mortgage repayments, even with
a sizeable loan - say 85% LTV (Loan to Value).
If that's the case, that's great, if not don't worry too much unless you're having to add more each month than you can afford, because capital growth will also make you money and will eventually take care of the deficit. You need to take into account all of the costs of letting, including agent's fees if you use one, all of which can quickly add up, and the gross return should be somewhere around 5 to 10 per cent. Capital appreciation in recent years has been phenomenal but this is unlikely to continue.
It is certainly likely to match, if not exceed, inflation in the long-term. A good guide is that rents should be approximately 130 per cent of the monthly mortgage repayment. Investment returns on property have been extremely good over the last 10 years or so, providing you have bought the right type of property in the right location. This has not always been the case because property prices have fallen sharply in the past, notably around 1989/1990. However, if you average out the total investment returns from property over most ten-year periods, and certainly over longer periods, return have been excellent.
The worst case scenario is to buy at the top of the market and be forced to sell at the bottom - then you would lose money. Generally though, income returns (yields) have been well above inflation and and favourably comparable to other forms of low risk investment, plus with property you also get capital growth. This has been exceptional, but don't expect these growth rates to continue for too long. The other aspects you need to consider are void periods and problem tenants.
One bad tenant or a void period of several months and you can have a severe dent in your investment returns. It's a good idea as a rule of thumb to allow for one void month per years in your budget. Despite warnings such as these, demand for renting is and remains strong. Demographics and changes in lifestyles indicate that this will remain so for the future and renting is a lifestyle that's here to stay in the UK.
How do I go about arranging my Buy-to-Let loan?
Once you have located a suitable property you need to contact one of
the many mortgage brokers with Buy-to-Let experience.
LandlordMONEY.com with
Homesaver Mortgages & Loans Ltd
will search the market for the best deal currently available
to suit your specific needs.
The lender will assess the property, it's condition, value and rental potential. The criteria varies from one lender to another and also the competitiveness of the market at the time of your application but most will be looking for a rental income potential of at least equal to the rental income and most often slightly more - 120% of your monthly re-payments would usually be about the minimum. For example, if your re-payments were £500 per month, then you would need a rental income of £620.
How much can I borrow?
Your borrowing ability will be determined by the property you are
borrowing against, any other rental income and properties you may
have, your letting experience, your annual income and that of others
you are buying the property with.
Some lenders may be willing to advance the full value of the property and also pay your survey and legal expenses as well, but the higher the LTV (Loan to Value) ratio, the more likely it is there will be extra charges. You will usually need to put down a deposit of 10 to 20% minimum. You need to be very realistic in budgeting exactly how much you can afford to borrow, and how much you can afford to pay back, taking the worst case scenario with letting problems.
What should I be looking for in a good Buy-to-Let deal?
Most people are just interested in the lowest possible interest
re-payment rate and of course this is very important. The
competitiveness of the market more or less guarantees you'll get a
good rate. What you do get depends upon many factors and the lenders
will take into account the property condition and value, the rental
income and some will focus more on your own income and perhaps your
letting experience and other properties you have in a portfolio.
You should also be interested in other factors to do with your mortgage: (1) look at the headline interest rate and the APR (Annual Percentage Rate) as it should include all set-up fees and admin costs (2) check to see if your broker is charging a fee and if so how much (3) how flexible is the mortgage, for example, can you have fixed rate or variable, interest only or re-payment, can you overpay and underpay, have payment holidays without penalties, can you extend the term, repay early or re-mortgage all with reasonable costs - many landlords re-mortgage regularly, freeing up capital to buy more properties.
Will my credit rating affect my loan application?
You cannot get away from the fact that if you have built-up any
degree of a track record of slow or late payments, non-payments of
bills and credit cards or you have outstanding debts, fines, County
Court Judgments (CCJs), an Individual Voluntary Agreement or
Bankruptcy, you represent statistically a higher risk to the lender.
You can check your credit file for a small fee (£2) to find out
if you are affected in any way with a low credit score. You can also
correct any incorrect entries. The answer is to build up a good
credit profile over time, using credit (if you have never used
credit before you may not have a long enough history on which your
lender can make a judgement) sensibly and paying all your bills on
time.
What kinds UK Buy-to-Let loans are available?
Variable Rate Buy-to-Let Mortgage
Fixed Rate Buy-to-Let Mortgage
Capped Buy-to-Let Mortgage
UK Limited Company Buy-to-Let Mortgage
Non-Resident Buy-to-Let Mortgage
Self-Certified Buy-to-Let Mortgage (For Self-Employed)
Stepped Rate Mortgage
Commercial Mortgages and Loans
Minimum Status Buy-to-Let Mortgage (Bad Credit History)
How long can the loan be for?
Most people borrow over a mortgage term of 25-years. However, this
can be varied, either shorter or longer depending on your
requirements. If you want to pay a lower amount overall (your
total repayments over time) you should go for a shorter term, though
with a repayment mortgage your individual monthly payments will be
higher.
On the other hand, you may have no option but to go for a long- term, may be over 40 years say, to reduce your immediate monthly payments. If you take on a longer term or an interest only mortgage to help in the short term, be aware that you pay more overall. You need to make plans to pay off more at some time in the future, and you don't want to be paying when you eventually retire.
What should I look for in an investment property?
You should focus on the needs of your target tenant, not on your own
personal tastes. You also need to match your letting property to the
needs of the locality. Painting, decor, furnishings and furniture
need to be neutral in colour and modern but conservative in style to
suit most tastes - loud and gaudy colours and way-out styles are
out.
Ask yourself, will as wide a range of people as possible, the types who live in the area, want to rent my property? Don't go for the most expensive fittings, kitchens, bathrooms, carpets, furnishings - go for durability and budget for replacements on say a five to ten-year basis. Take a look at some of the other properties to-let in the area and take notice which ones go quickly.
Speak to local letting agents and take notice the properties they have on their books - one-bed, two-bed flats, studio apartments, full semi and detached houses etc. See which properties are in demand and which types of tenants are on their waiting lists, if any.
The property needs to be in sound structural repair with low maintenance needs and reliable appliances such as heating, plumbing, wiring, lighting etc, so you need to budget for a condition survey before you purchase. Some types of property may be excluded by lenders from their Buy-to-Let mortgages stable being considered too risky.
Freehold flats or maisonettes, HMOs and bedsits may fall into this category. It's usually a condition of a Buy-to-Let mortgage that tenancy agreements are Assured Shorthold Tenancies and lenders often specify that an approved letting agent must be used.
What about using a letting agent?
There are many plus points to using a letting agent, preferably one
that's a member of a professional association. Their experience of
the market, the advice they can give you, their knowledge of
the legal side of letting, their marketing expertise and sources,
how to attract tenants and close the deal, how to screen and check
out tenants, their contacts with maintenance people and on going
management expertise.
These aspects are often invaluable. They also carry professional indemnity insurance and your deposits are bonded, which means the money is safe whatever happens. Agents usually charge around 10% (around 1 month's rent) for letting only, and around 15% of your rental income as an on-going management fee.
What about doing it myself?
Your lender may stipulated that you must use an approved
letting agent, especially if you have no letting experience.
However, it is often possible to do-it-yourself. Most agents are
fine and do a great job, but as you get more experience you will
find that your personal involvement and commitment can go that bit
beyond the capabilities of most agents.
If you are lucky enough to be able to develop the expertise and
you have a little bit of spare time (if you get organised it takes
less time than you might think) needed to become a successful
landlord, it's a great way to boost the profitability of your
lettings enterprise - you can save yourself up to 15% of your income
doing it yourself. It's also a very satisfying thing to do because
you are using your management skills meeting and helping lots of
people in your community by providing these services.
Who owns LandlordMONEY.com ?
LandlordMONEY™ is run by the
operators of LandlordZONE®
and TenantVERIFY®
providing reliable quality web based and
text based services to landlords since 1999. Part of the SafeBury
Web Trader Scheme we pride ourselves on providing quality and
professional guaranteed services that our clients can totally rely
on. LandlordMoney.com Secure Property Finance operates in
association with
Homesaver Mortgages & Loans Ltd,
experienced brokers authorised and regulated by the FSA.
Registration No 301911 - totally independent UK mortgage brokers who
have access to every Mortgage in the UK.
Regardless of your credit circumstances
we’ll work hard to find a mortgage that is right for you. We will
never sell a mortgage that is not in your best interest. If there is
no benefit to you in re-mortgaging then we will advise you of that.
Being independent, we will select products to meet your needs from
our analysis of the market. Our staff are professional, trustworthy
and fully trained. We comply willingly with regulatory and industry
standards of best practice. We subscribe to the Financial Services
Authority code of practice.
Do you have qualified mortgage advisers?
Yes, all of our mortgage advisers have a considerable amount of
mortgage experience and hold a recognised professional mortgage
qualifications.
Do you provide mortgages for ex-pats?
Yes, we are able to deal with property owners anywhere in the world,
those with UK based properties those with properties abroad. We have
a have considerable amount of experience in arranging buy-to-let
mortgages for ex-pats.
Do you provide mortgages for commercial property investors?
Yes, we can source commercial mortgages and loans.
Can you recommend a good letting agent?
We hesitate to recommend individual letting agents, but we would
always recommend you choose one which is a member of one of the main
professional associations: RICS, NAEA, ARLA, NALS,
Do you charge fees?
The mortgage lending business is very competitive and we provide a
very comprehensive service. In some cases no fees are charges and in
others there will be a fee depending on the time and work involved.
We will always tell you in advance of there is a fee to pay.
Are buy to let mortgages regulated?
Buy-to-Let mortgages are defined as un-regulated mortgages so these
types of mortgages are not covered by FSA regulation, though
Homesaver Mortgages & Loans Ltd
are and always comply with FSA guidelines.
What do these technical interest rate mortgage terms mean?
Variable rate mortgage - you lender changes the
interest rate following Bank of England base rate changes. Fixed
rate mortgage - the interest rate is fixed at a set level for a
set period, which will have a slightly higher rate to start with.
Base rate tracker mortgage - the interest rate tracks
exactly the Bank of England base rate. Capped rate mortgage
- the interest rate has a maximum amount but still varies below this
level. Discounted rate mortgage - the interest rate my be
either fixed or variable, but for a specific period may be
discounted by a small amount - say 0.75% Deferred payment
mortgage - again the interest rate you pay can be either fixed
or variable, but for a specific period of time you pay at a lower
rate, but you pay more in the long-run.
Will I need insurance?
You will most definitely need insurance. First you will need
personal injury and life cover to pay off the loan should disaster
strike, otherwise the property would have to be sold.
Secondly, as a Buy-to-Let landlord you are responsible for both your property and your tenants, so buildings insurance, fire and flood, storm etc is vital. Perhaps the most important though is landlord's liability, which covers you for public liability and third party claims.
If a slate falls off the roof on someone or your tenant trips
over a ruck in the stair carpet, claims can be astronomical!
Fortunately, all these types of insurance are fairly reasonable in
cost and you will receive advice on this when you take out a
mortgage.
What will happen if I cannot keep up my payments?
Your investment property will be at risk and could be repossessed if
you fail to keep up your mortgage re-payment commitments. You
should contact your lender immediately if you are having
difficulties. There are many strategies which can be adopted to help
your through a difficult but temporary period such as reducing or
even suspending payments for a time, or extending the overall
mortgage term. You can also get if you are having payment
difficulties form The Citizens Advice Bureau or The Consumer Credit
Counselling Service, contacts available on-line.
Will I need a landlords licence?
The 2004 Housing Act has introduced a plethora of new rules and
regulations to do with letting and without doubt the task of "landlording"
will be more onerous in the future. If you own a certain type of
property - when you are letting to multiple occupants such as
students - or it's in a certain usually deprived area or town, then
you may need to apply for a landlord's license from your local
authority. In this case your property will have to meet more
stringent safety requirements and you as landlord will be required
to prove you are a "fit and property person" to manage the property.
Of course, you can use a managing agent to do this for you if you
wish. As a rough guide it's thought that one in ten rented
properties fall into the licensing category.
Is there tax on my rental income - what do I have to pay?
Any income you earn from letting property must be declared on the
property section of your income tax return. Although property income
is classed as unearned or investment income, it is aggregated with
you other earned income and you will pay tax at your highest
marginal rate. So if you are a high-rate tax payer you will pay tax
on your rental income at 40%.
However, there are some quite generous expense allowances which equate to business expenses so you need to be organised, run you letting operation like a business and claim what you can. If your property makes a loss in the early years the loss can be rolled over to subsequent years, or set against profits from other rental income you may have. You cannot however set rental losses against earned income in the UK, as you can in some countries.
You can claim all the interest you pay on your Buy-to-Let mortgage against your rental income. Repairs and maintenance can be claimed as an annual expense, but improvements to the property, sale and purchases costs cannot and must be capitalised for redemption on sale. Expenses you can claim include:
See Taxation
What happens when I sell - will I pay any tax?
Unfortunately yes, you may have to pay capital gains tax (CGT)
if your investment has been successful and you have made a
substantial capital gain. You will pay tax on the difference between
the buying price plus buying costs and any renovation costs,
and selling price less any selling costs.
From the calculated gross gain you then deduct some less specific allowances and tax reliefs. The tax only applies to properties which are not main residence. CGT is charged at your highest marginal rate - 40% if you're a high rate tax payer. From the selling price you can deduct legal fees, marketing costs, estate agent's commission, but unfortunately you can't claim the cost of mortgage redemption fees if you redeeming early.
Having worked out your actual gain you can then deduct an
indexation allowance linked to the cost of living index for periods
of ownership up to 1998 and what is known as taper relief post 1998
and your personal relief which currently is £8,800. If your property
is owned jointly with your spouse, you can include both your
personal capital gains allowances. Unlike a business or trade, you
cannot apply roll-over relief to your residential lettings. See
Taxation
How can I limit my tax bill on disposal or on death?
If you have lived in your rental property in the last three years as
your principle residence you may be exempt from some or all capital
gains tax on disposal - special rules apply. Otherwise it may be
possible to actually move into the rental property if you are so
minded as your main residence after your tenant leaves.
You would need to be able to prove that it is indeed your now main private residence and not just a tax avoidance scam. Unmarried couples owning more than one property may be able to claim one property each as their principal residences, but this must be able to prove that they really did live in each property for a specified period of time.
Inheritance Tax on death is complicated area and generally your
need to consult a tax planning specialist on this. You should plan
your tax affairs well in advance to minimise your tax liabilities
especially if you are intending to acquire a large portfolio of
properties and other investments. See
Taxation
Information here is general only & believed to be correct, though we cannot guarantee
it, nor do we accept any liability if you act or fail to act on this information. Always seek professional advice before
making decisions. Investments can go down in value as well
as up over time.
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