If you want to take out a mortgage on a property that you plan to rent out, you’ll need a buy to let mortgage. Buy to let property can provide you with an income while your house, hopefully, increases in value at the same time. This means it’s a popular form of investment, but it’s important you know what you’re getting into as there are some key differences when it comes to purchasing a buy to let property, compared with the usual process of buying a house.
How is buy to let different to getting a regular mortgage?
Mortgages for buy to let properties are riskier for lenders, in part because they’re usually interest-only. This allows you to keep the monthly repayments down as the buyer. However, at the end of the mortgage term, the purchase price hasn’t been paid off, so you still don’t own the property outright. This means you’ll either have to remortgage, sell the house, or pay it off another way.
Because of the greater risk, lenders tend to charge higher fees than on a regular mortgage. Interest rates are also higher, while you’ll also be expected to put down a higher deposit. The minimum deposit is usually 25% of the property’s value, although this can vary between 20-40% with different lenders.
The final significant difference between buy to let and regular mortgages, is that buy to let lending isn’t typically regulated by the Financial Conduct Authority (FCA). There are exceptions, but going with a mortgage supplied by an FCA authorised lender could give you greater peace of mind.
How much can I borrow if I’m buying to let?
The maximum amount you can borrow on a buy to let mortgage depends on how much rent you can charge for the property. Generally, lenders will require your rental income to be around 25-30% higher than the mortgage payment. You may also need to prove your affordability, which could mean the lender requires you to be on a salary of £20,000-£25,000. This shows the mortgage company that you could still afford the repayments even if the house is empty for a period of time.
What is the best buy to let property type?
Quite simply, the best properties for buy to let are ones in a desirable location. Whether this is because of the area itself or the transport links on offer, if no one wants to rent your property then you’ve got a major problem on your hands. If there isn’t local demand for the type of property you’re looking at, it’s probably best avoiding it. For example, you might be interested in a flat above a restaurant, but if the biggest demand in the area is for young families, you may struggle to let it out. Blocks of flats with lots of other buy to let investors can be something to avoid, as the competition could mean rents are driven down, or even your property remaining empty.
How much is stamp duty land tax on buy to let properties?
A new law was brought in on 1 April 2016 that saw an additional 3% added to every SDLT band on buy to let properties above £40,000 if you already own another property. This means, for example, that if you’re buying a property for £250,000, the stamp duty will cost £10,000 instead of £2,500. There are also changes to how tax on buy to let property works. In the past, you could offset mortgage interest and buy to let fees against income tax at up to 45%. This tax relief is being reduced, with the new cap at 20%, and you should obtain specialist tax advice if you think you may be impacted.
What are the landlord responsibilities with buy to let properties?
If you’re wondering whether you’re ready to take on the role of being a buy to let landlord, it’s a good idea to know your legal responsibilities: you may find it useful to contact a lawyer who specializes in Landlord and Tenant law for any specific advice. Things to be aware of include:
You need to provide a contract for your tenant, which most commonly comes in the form of an Assured Shorthold Tenancy (AST). This gives your tenant the legal security that they can live in the property for the fixed term specified, or on a rolling basis.
Right to rent
As the landlord, it’s up to you to check that any prospective tenants have the right to rent property in the UK.
Tenancy deposit protection
You need to place your tenant’s deposit in a government-backed tenancy deposit protection scheme (TDP), then provide them with details of where their deposit is being kept.
Gas and electric
As well as regular checks on wiring and electrical appliances, you need to carry out an annual gas safety check, covering all of the gas appliances in the property. When this has been done, you must provide your tenant with a copy of the certificate.
Energy Performance Certificate
EPC’s are valid for ten years, and your property must have an up to date certificate before you can rent it out. A copy should also be supplied to your tenant.
Protecting your tenants against the risk of fire is very important. Soft furnishings and furniture should meet fire safety regulations, while fire alarms and smoke detectors should be fitted and in working order. Carbon monoxide alarms should also be fitted in rooms with gas appliances.
Disclaimer: The article above is only a rough guide to give you some idea of the of what is involved with buying a property to let.