If you're thinking about investing in a buy to let property this is a guide you need to read.
Buy to let mortgages are designed for those wanting a mortgage for the purpose of letting the property out to tenants.
These mortgages have become increasingly popular over the past few years, driven by increasing house prices, a strong demand for rental properties and a drop in the interest rates available to private landlords. A wide range of buy to let mortgages are now available, including fixed rate, discount, tracker and variable rates.
Buy to let mortgages differ to residential mortgages in three main ways:
- 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 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.
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 most other forms of investment and there is no guarantee that house prices will continue to rise. That said, letting a second property to tenants can reap considerable financial rewards over time.
When buying a 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 in the property as it increases in value over time. The decision may affect the type of property you purchase, and the location. For example, a prime city centre location may be more suited to high growth.
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.
The 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.
- furnishin - 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 suit before it is suitable to be let to tenants.
When choosing a property to let it is wise to take advice from local letting agents to determine what type of properties are in demand and in which areas. The Association of Residential Letting Agents (ARLA) state that a property 'needs to be in the right area, close to transport and other facilities, and in good condition'.
When choosing a letting agent to act on your behalf it is sensible to choose one that is a member of the ARLA. The reason is because members of the ARLA 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 www.arla.co.uk for further information on becoming a private landlord.
NB This information is provided to give you an overview of the different types of mortgages available. It is not comprehensive and you should not base your mortgage decision on the information found here. We recommend you seek professional advice in order to determine the most suitable mortgage for you.
