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Buy-to-let guide

Buy-to-let guide

Our authoritative guide will help you capitalise on tenant demand and secure the right buy-to-let mortgage.

When people are unable to get onto the property ladder or uncertain about moving, they end up renting for longer periods.

The background

A surge in tenant demand for rental homes leads to more competition, and therefore, higher rents. Landlords end up making a tidy profit, which encourages them to expand their property portfolios. A resurgence in the buy-to-let market also entices new buy-to-let investors to put their money into property.

With the number of buy-to-let loans reaching its highest level for four years in 2012, record rents propelled landlords into expanding their property investments.

According to the Council of Mortgage Lenders, gross buy-to-let lending hit £16.4bn over the year, up 19 per cent on the £13.8bn lent in 2011.

Overall, 136,900 loans were offered last year, the highest number since 2008 – although still a long way off the high of 346,000 seen back in 2007.

Average UK rents have soared by 13.6 per cent since 2009, with a further rise of 2 per cent predicted in 2013.

In addition, the number of UK households renting has increased over the past decade from 31 per cent to 36 per cent, according to the latest Census data.

What is a buy-to-let mortgage?

A buy-to-let mortgage is money offered by a lender (a bank or building society) to fund a property that will be rented out. The borrower will not occupy the property.

How does a buy-to-let mortgage differ from a regular residential mortgage?

The difference between a buy-to-let mortgage and a standard residential mortgage is how the borrower’s income is assessed.

Instead of looking at your earned income, a lender views potential rentals income as your primary income source. Some lenders might also take the landlord’s personal income into account.

As different lenders assess this in different ways, you must compare all of the deals on offer.

How do buy-to-let mortgages work?

Typically, lenders will want your anticipated rentals income, verified by independent sources, to meet at least 125 per cent of the monthly interest payments on the loan. This will be based on the pay rate for fixed and tracker deals, or a lender’s standard variable rate (usually an extra 1 per cent, or more).

This is to ensure landlords (and the lender) is covered during void periods when the property is empty and not rented out. This reassures the lender that the borrower will still be able to meet the payments.

Lenders generally lend mainly to those with large deposits, with most deals expecting you to put down at least 30 per cent (or even 40 per cent) as a deposit. The best deals are at the lowest loan-to-value rates of 60 per cent or below.

Loan fees

Buy-to-let mortgage fees that secure the best rates are usually not low. A top fixed rate deal could have a loan fee of two and a half per cent (£2,500 on a £100,000 mortgage, for example), or higher.

Those deals with higher interest rates will charge lower loan fees.

Before signing up for a loan, you need to make sure the high loan fee you’re paying is worth it. Many loans attract such high fees a higher interest rate might be a better choice.

Rentals returns

Try to achieve a 5 per cent return on your rentals investment every year. Some properties might reap as much as 7 per cent annually.

Does the type of tenant matter?

The type of tenant renting your property can make a big difference.

For instance, many lenders have restrictions on mortgages for student lets and homes of multiple occupancy (HMO).

At least three tenants live in an HMO building, forming more than one household and sharing toilet, bathroom or kitchen facilities.

Tax implications

Unlike residential property, a buy-to-let property is not exempt from Capital Gains Tax. Also, rent received is regarded as taxable income.

However, you can offset interest payments on your mortgage against tax on rentals income, along with other expenses (such as agent’s fees and some maintenance costs).

It makes good sense to get advice from your accountant before you take out a buy-to-let mortgage.

Agent’s fees

Lettings agents can find tenants for you and look after the tenant and your property.

This could include anything from carrying out a credit check on a potential tenant, drawing up a contract, putting together an inventory of contents and the condition of the property when let, to arranging for someone to fix a broken boiler and chasing up money from an errant tenant.

There are mandatory health and safety gas and fire inspections and precautions to be taken. An agent can handle all of this for you.

Lettings agents typically charge about 11 per cent to 17 per cent in fees, and sometimes a one-off charge to locate tenants.

Property investment funds

You don’t have to actually buy a property outright in order to be an investor.

There are a number of property funds, some of which put investors’ money into residential property.

Putting your money into a bigger residential property fund could be a low cost and stress-free way to get income from letting property.

Many property fund investments can be purchased through an ISA, which cuts down on income and Capital Gains Tax.

Buy to let tips

  • If letting to students, you can convert the living room into an extra bedroom, increasing the number of tenants – and your rentals income.
  • Modernised properties tend to let quicker and for more money than older homes.
  • Check tenant references thoroughly, including credit checks and guarantors.
  • Always clean and redecorate after a long tenancy.
  • Don’t be greedy. It’s better to hold onto a good tenant paying a sensible rate, rather than ousting them in the hope of someone (probably more demanding) paying more.
  • You might find yourself competing with other buy-to-let landlords if you buy on a big development. Either make your property stand out, or consider buying on a smaller site.
  • Choose locations near good transports links, a variety of employment and appealing shops and restaurants
  • It might be less expensive to remortgage your own home when borrowing money for buy to let, rather than getting a buy-to-let mortgage. Get advice from a financial expert.
  • Match the tenant to the area. If you live near a good state school, for instance, you could do well renting to families. And young professionals are attracted to areas with lively bars and a good arts scene.
  • When choosing a lettings agent, make sure he or she is a member of the Association of Residential Letting Agents and the National Approved Lettings Scheme.
  • Look for the next ‘hot spots’ where regeneration, new transport links and employment opportunities are in evidence.
  • Prime property holds its value better in a downturn.
  • New research shows that period homes hold their value better than newly built property.
  • Ask yourself if you can still afford to pay your buy-to-let mortgage if you lost your job, had your hours cut or fell ill?
  • Factor in extra cash for maintenance (if you don’t replace that worn carpet every so many years you won’t get a quality tenant).
  • If you can manage the property yourself, or even carry out some of the maintenance and repairs, you will make a larger profit.
  • Provide a small ‘welcome pack’ (tea, milk, bread, cheese, biscuits, information about the area, and a chilled bottle of wine) for the new tenant. This will help kick off your relationship with the new arrival – hopefully, leading to a long and prosperous tenancy.

While every effort has been taken to ensure the above information is up to date, some inaccuracies may occur. All information was correct at time of publication and is provided in good faith.

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