Is buy-to-let right for me?
Buy-to-let can be a sound investment long term, but it also ties up large amounts of money and comes with some risks, so it’s not a decision to be taken lightly. Before embarking on purchasing a buy-to-let property, consider the following:
Access to your money
Consider how long it could take to get access to your money again. With other investments, such as shares, you can sell straight away and have cash in a few days, but it can take three to six months to sell a property, and to get the best sale price it would need to be empty of tenants.
If you change your mind about being a buy-to-let landlord there are considerable costs in selling, in particular legal fees for conveyancing and possible Early Repayment fees on your mortgage.
Risk versus return
While property is historically a good investment, it is not foolproof; house prices can fall for many reasons – national economic issues, local blighting from a new development, bad neighbours or a property falling into disrepair, so it’s possible you could lose some of your original investment.
You will find periods when you are between tenants when no rent is coming in but the mortgage still needs to be paid, and all homes require some level of repair and routine maintenance, so you have to be prepared for periods when you will paying out rather than receiving a return. You will need to pay for gas and electric safety checks and, unless you choose to do all the hard work yourself, property management fees.
Don’t forget that you will need to declare the money you make as a landlord, and this will usually involve an annual tax return. Individuals have a £1,000 property allowance that can be taken off your annual profit from being a landlord. In addition, unlike your own home, which is free from taxation on any increases in value, you will have to pay capital gains tax when you sell a rental property.
Being a landlord comes with some legal responsibilities, particularly about the safety of the building, as well as checking the immigration status of tenants, so you need to be willing to keep records and do some paperwork (or pay a letting agent for full management).
Cost versus convenience
To get the highest return from a buy-to-let property you need to manage it yourself, dealing directly with tenants and organising tradespeople for repairs (when you can’t fix it yourself). For this option you will need to be up-to-date with all the relevant legislation, have time to deal with issues and ideally live locally to your rental property. If this doesn’t appeal, there are other options:
- You could use a letting agent to find a tenant and do the initial paperwork, including taking references, running credit checks, checking immigration status and collecting a deposit, then manage it on a day-to-day basis yourself
- You could use the initial letting service, plus a rent collection option so the agent will deal with those tricky unpaid rent issues, but you would still be responsible for organising repairs and maintenance
- For complete peace of mind you could have a full management service, which also includes organising repairs and maintenance and all liaison with the tenants
- Some companies offer a complete turnkey option, usually in purpose-built blocks of apartments where they build, furnish, find a tenant and manage both the financial side and the property repairs
All this comes at a price, however. You can expect to pay three or four weeks’ rent as a flat rate fee for finding a tenant and doing the initial paperwork; around 5% of the monthly rent for a rent collection service and anything from 12-20% of the monthly rental for full management. Bear in mind that with a full management service the priority will be getting repairs and maintenance done swiftly and efficiently rather than for the cheapest price, so you may also find that your repair costs are higher than if you use a combination of your own skills and relevant tradespeople when necessary.
What are the criteria for a buy-to-let mortgage?
Do I have to have a buy-to-let mortgage?
If you are buying a property with the intention of letting it out, then you must purchase it using a buy-to-let mortgage rather than a normal residential one. If you already own the home and become what is often called an “accidental landlord” – perhaps you move in to a partner’s home or inherit a property, or you move temporarily for work and want to rent your home rather than sell it – then you will need to obtain permission from your lender, which will normally involve either an increase in interest rate or being made to transfer to a buy-to-let mortgage.
Who can get a mortgage for buy-to-let?
Lenders will consider adults from aged 18, right up to people in the 70s and 80s in some cases, for buy-to-let mortgages. You can buy as an individual, jointly with a partner, or with up to three friends (with some lenders). You will need to have a good credit history, or be prepared to pay much higher rates for a specialist lender.
Does the rental income matter?
As with any mortgage, affordability is the key word, which in the case of buy-to-let mortgages means that lenders will use a measurement called Interest Cover Ratio (ICR) to calculate how risky the investment is. Basically, the ICR is the ratio to which a property’s rental income must cover the mortgage payments. Lenders are required by the Bank of England to make sure that buy-to-let investors have an ICR of 125% (so every £1,000 of mortgage payments is covered by £1,250 of rental income), but individual lenders can choose to set higher levels, often around 145%.
How much do I need to earn for a buy-to-let mortgage?
Although lenders will mainly base a decision on the Interest Cover Ratio, they will also assess your income as a safety measure, to make sure that you could cope with a prolonged period of having no tenant. Most lenders have a blanket £25,000 minimum income, although if you have varied sources of income, a large deposit, or considerable equity in your own home, a good mortgage broker, such as Embrace Financial Services may be able to find a lender with less restrictive rules.
Can I get a buy-to-let mortgage as a first time buyer?
If you are a first time buyer, you might consider buying a home as an investment but not living in it – perhaps your job comes with accommodation provided, or you haven’t decided where to settle down. It is possible to get a buy-to-let mortgage in these circumstances, but it is important to realise that buying a rental property will remove your official status as a first time buyer. As a result, when you come to buy your first home to live in, you won’t be liable for the first time buyer discount on Stamp Duty, you won’t be able to buy with Shared Ownership, you won’t be eligible for Help to Buy: Equity Loan after 2021 and you are unable to use the Lifetime ISA to gain Government money for a deposit.
How much deposit do I need for a buy-to-let mortgage
Normally you will need at least a 20-25% deposit, with the best rates only available with a 40% deposit.
How to buy-to-let
Find a property
There are considerations when investing in a buy-to-let property that might not apply when you are buying your own home. In particular, you should think about how desirable an area is for tenants, what kind of tenants you are likely to find, and what kind of property is most sought-after.
For example, university towns always need student accommodation, so you might want to look at large Victorian properties that four or five students can share (although health and safety rules are stricter with this kind of rental property and lenders may be more cautious). On the other hand, well-appointed flats for young professionals or couples may be a more obvious investment in Greater London. Do your research thoroughly before making a decision.
Tempting as it is to buy an investment property straight from the internet, experienced landlords always recommend a visit to get a feel for the area and the property.
Find a mortgage
With the criteria for buy-to-let being significantly different than a standard residential mortgage, you are likely to want the benefit of an experienced mortgage broker to guide you through. Embrace Financial Services can talk to you in person at a venue and time to suit or arrange to chat over the phone.
Find a tenant
You could of course advertise your rental property in a newspaper, online or on social media, but most landlords find it helpful to use a letting agent to find a tenant and carry out the necessary checks on identity, financial security, references from previous landlords and immigration status.
All about buy-to-let mortgages
What types of mortgage are available?
Unlike residential mortgages, most buy-to-let mortgages are offered on an interest-only basis, so your monthly payments only pay off the interest, rather than the reducing the capital amount that you owe. The whole of the original amount borrowed will therefore still be owed at the end of the mortgage term, so the lender will want to know that you have a plan to repay the outstanding amount (which could be selling the rental property, or selling other investments or assets).
Interest-only mortgages are cheaper per month than repayment (as you are not making any payments towards the loan itself), so are popular with landlords who want to generate the maximum income each month. However, if you prefer to own the property outright over time, a range of repayment mortgages are available, including fixed rate, discounted rate and tracker mortgages. It is best to use a mortgage broker, such as Embrace Financial Services, to guide you through the most appropriate type of mortgage for your particular investment aims and personal situation.
Buy-to-let mortgage rates
Because of the increased risk involved in buy-to-let property, mortgages tend to have slightly higher interest rates, although at a time of generally low rates the difference is relatively small, especially if you have a good-sized deposit.
Buy-to-let mortgage fees
The fees paid to the lender can be much higher with a buy-to-let than with a residential mortgage – fee-free deals are almost unheard of, with fees ranging from £150 to well over £3,000 and in most cases coming in at around £2,000.
What other costs are involved?
Stamp Duty Land Tax is paid when you purchase a home. Those who already own a residential property (whether they live in it or rent it out) have to pay an additional 3% on top of the standard Stamp Duty rates.
Before giving you a mortgage, the prospective lender will need to value the new property, although the cost of this may be included in the general administration/arrangement fee.
Even if you’ve paid for a mortgage valuation, you should also consider an independent survey. There are various surveys available which are detailed in a brochure that has been produced by our sister company, e.surv Chartered Surveyors.
If you use a mortgage broker to help you get the best deal on your mortgage, you will usually have to pay a fee, although with Embrace Financial Services the first appointment is always free of charge. You should be told exactly what you will be charged when you decide whether to engage a broker.
Conveyancing and legal fees
The process of transferring the legal title from the previous owner of the home to yourself (conveyancing) will cost from around £930-£1,200 for a freehold property and £1,110-£1,390 for a leasehold purchase. Searches will cost around £300 more, plus the Land Registry Fee of up to £540.
You will need buildings insurance from the moment of exchange of contracts, and you will need to declare to your insurer that the property is tenanted. You may also want to consider Landlord insurance that would cover you for loss of rental if the property was uninhabitable after a fire or flood, legal expenses insurance if you need to evict a tenant and tenant default insurance that protects you when a credit-checked tenant fails to pay the rent.
Safety and legal requirements
As a landlord you need to make sure the home has an Energy Performance Certificate, a Landlord Gas Safety Certificate for any gas appliances that is updated every year, and working smoke detectors (and in some cases carbon monoxide detectors).
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. Embrace Financial Services usually charges a fee for mortgage advice. The precise amount of the fee will depend upon your circumstances but will range from £499 to £999 and this will be discussed and agreed with you at the earliest opportunity.