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If you're thinking about investing in a buy to let property, this is a guide you need to read.
Buy to let mortgage deals are used by people who want to generate an income from the property they intend to buy, rather than live in it.
Buy to let mortgages differ from residential mortgages in three main ways:
Rent Potential - whether or not you will be offered a mortgage is assessed on the potential rental income from a property rather than your own personal income
- 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
A wide range of buy to let mortgages are currently available, subject to the above restrictions. Options include fixed rate, discount, tracker and variable rates: see our guide, Fixed, Tracker or Discount Mortgage? for more information on the benefits of each type.
What are the best buy to let mortgages?
The best mortgage deal for you depends on how you want to manage your income and you repayments. A buy to let mortgage comparison will help you decide your priorities and choose the most suitable product.
Buy to let mortgage lenders base their rates on the size of the mortgage required, the size of your deposit, the potential rental income from the property and sometimes your personal income.
Should you do it?
Becoming a private landlord should not be seen as an easy way of making money. It is riskier, more complicated and more time consuming than many other forms of investment.
That said, letting a second property to tenants can reap considerable financial rewards over time. If you compare buy to let mortgages you should be able to find a suitable product 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 in the property as its value increases over time?
The decision may affect the type of property you purchase, and the location. A prime city centre location may be more suited to high capital growth, affecting the best buy to let mortgage rates available to you.
Before choosing a property to let or a mortgage it is a good idea to consult local letting agents, the Association of Residential Letting Agents a (ARLA) and mortgage brokers to get an idea of your options.
Getting the best buy to let mortgages depends as much on the property you invest in as it does on your personal circumstances, so it is vital you talk to all these experts before making a decision.
Are let to buy mortgages an option?
Let to buy mortgages are available to homeowners looking to purchase another property rent out their existing home to tenants.
This makes let to buy mortgages an alternative to buy to let mortgages if you want to generate a rental income without selling your existing home.
The amount you can borrow will depend on the rental income you can generatefrom your existing property and if this is sufficient to cover the necessary mortgage repayments on your new home.
What costs will you incur?
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 130% of the rental property's mortgage repayments (interest only) in order to cover your costs.
Additional costs include:
- letting agency fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants and an additional cost of around 5% if you require a full management service.
- ground rent / service charges - applicable to leasehold properties.
- property's upkeep - maintenance costs for the property.
- gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations.
- insurance - building insurance and content insurance for those items provided as part of the rental agreement.
- furnishing - the purchase of any furniture if the property is to be let furnished.
- legal insurance - to cover the costs of evicting tenants in the event of non payment.
- decorating costs - the property may require work ranging from painting to a new bathroom suite before it is suitable to be let to tenants.
Which property?
Take advice from local letting agents before choosing a property to let to determine what type of properties are in demand and in which areas. The ARLA states that a property 'needs to be in the right area, close to transport and other facilities, and in good condition'.
If you arrange to have a letting agent manage your property on your behalf it is sensible to opt for one that is a member of the ARLA, because all ARLA members must join in a bonding scheme to protect rent and tenant's deposits. The bond provides total compensation of up to £2 million a year.
There are a number of tax issues that need to be explored in order to maximise your tax position, such as being able to offset your maintenance costs, letting agent fees as well as any interest paid on a buy to let mortgage against your tax.
You can visit the ARLA website at for further information on becoming a private landlord.
