Buy to Let
Having a property to let could reap considerable financial rewards over time. The key to success is knowing the best areas and types of property that will let out easily in order to generate the best return on your investment, along with the potential pitfalls and problems associated with letting out a property.
One of the main important factors involved in purchasing a property to let is your Buy To Let mortgage. These types of mortgage work completely differently to a standard residential home loan and so it helps to have a good understanding of what is involved in obtaining a BTL mortgage (as their often referred to).
To help you get an idea we have a few criteria guidelines to consider below:
What are the main differences between an ordinary mortgage and Buy to Let mortgages?
- Deposit – Generally lenders will expect a larger deposit for a Buy To Let mortgage, typically 25% of the purchase price of the property, although there are several lenders now offering loans with just a 20% deposit (dependent on the rental figure achieved)
- Affordability – Lenders generally work out whether you are able to borrow the required loan amount based on the rental figure you will receive from any perspective tenant (some still stipulate that you must also earn an income above a minimum threshold on top of the rental income received)
- Interest Rate/Fees – Buy to Let mortgages typically have higher interest rates and can also have higher fees to reflect their riskier nature
- Maximum Age – As the mortgage is based on the rental figure received and not your employed/self employed income, Buy To Let mortgages can generally be taken out over a much longer period than a standard residential mortgage, with certain lenders allowing you to take the mortgage up well past your retirement age
What is your objective?
There are two main reasons people invest in Buy To Let properties and depending on your intentions, you may choose one of two repayment methods:
Interest Only – Generally, with an Interest Only mortgage, as the monthly mortgage payment is lower than the repayment option, the investor is looking for a monthly return on their investment along with an element of capital growth from the property.
Repayment – With the repayment option, the investor is generally looking at the property to provide an income into retirement as the mortgage would generally be fully repaid by a certain age, leaving the investor with a monthly income along with the capital element from the full value of the property.
Anticipate the costs of being a private landlord
As a private landlord you are responsible for many costs in addition to just the monthly mortgage repayments. These additional costs include but are not limited to:
- Property upkeep – Maintenance costs for the property
- Letting agent’s fees – If you don’t intend to manage the property yourself then letting agents charge around 10% of the monthly rent for finding and vetting tenants (full management services typically cost an additional 5%)
- Ground rent / service charges – Applicable to leasehold properties
- Legal insurance – Don’t underestimate the costs if things go wrong. Evicting tenants in the event of non-payment can be very expensive.
- Buildings Insurance – To cover your investment against unforeseen events
- Furnishings – If the property is to be let furnished, make sure you are covered for this by your home insurance. How much will it cost you to furnish the property beforehand?
- Gas / electrical appliances – The cost of maintaining appliances and ensuring they comply with any regulations such as safety tests
- Decorating costs – The property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants Redecorating may be required on a regular basis
Do your homework
When choosing a property to let it is wise to take advice from local letting agents to determine what types of properties are in need and which parts of the town are best or most sought after. For example, is there is a University nearby and if students are looking for somewhere to live.
Not all Buy to Let mortgages are regulated by the Financial Conduct Authority.