Demand is high for rented property and short term lets.
This gap in the market has been filled increasingly not by bigger landlords, but by individuals buying one or more properties, in addition to their home, seen as an investment and the rental received used to cover the cost of the loan.
The main difference between a buy to let mortgage and a standard home loan is that most lenders won’t just take your salary in to account when assessing eligibility. Potential rental income from the property is often also included in their assessment.
If this is the first time you are embarking on the buy to let finance, here is a quick guide for you –
Why Buy to Let?
Property is deemed an excellent long-term investment, with the potential to offer a fair income and good growth. Capital growth in property over past years has exceeded most other areas.
Change in the market and delays created by selling property will never make it a sensible investment for anyone needing short term returns or access to their money quickly.
Many people invest in a buy to let property as a pension – the rental received on a monthly basis can be used to supplement your pension income, or the property can be sold and the proceeds used as a nest egg.
Choosing the right Buy to Let property
Good research is vital when choosing a property to rent out. Is there local transport links, is there parking, is it close to amenities, close to schools? It is important not to be encouraged by your own requirements and think what would be important to the majority of people and most importantly consider demand in the area. Local agents should be able to offer advice. Demand is there for furnished an unfurnished property so you have to consider the resources you have and the finance as to how you wish to let the property out.
The property will need to be let out as consistently as possible to ensure the rental yield is there to service the monthly payments.
The Association of Residential Letting Agents produce a booklet giving you tips on what to look out for when choosing a buy to let property.
What will a Buy to Let cost?
Mortgage rates tend not to be the same as a residential mortgage, this type of lending is considered greater risk so the rates can be up to 1% point higher than residential rates. The deposit required for buy to let is also higher.
You will need to make allowances for survey fees and legal costing for purchases too.
There can be service charges on leasehold property. If you plan to let the property furnished, you will have to allow for the cost of buying reasonable quality basic equipment – strict fire regulation prevents the use of cheap furniture.
Unlike many of our competitors, we will not charge a fee for our mortgage advice services, even if the case does not complete.
If you’re using a letting agent, you will need to factor in their costs which are usually a percentage of the rent received per month. You will need to factor in the cost of insurance – not just for buildings and contents, but against loss of rental income, possible damage made by the tenants or for legal fees should the tenants need to be evicted.
Unfortunately, rise on value of this property, unlike our residential homes will be subject to capital gains tax. Any individual is allowed £10,000 per annum (always check with the HMRC as this figure can change) income tax free. However some maintenance and running costs can be set off against tax. Mortgage interest payments on buy to lets, for example, can be set against rental income.
Blue-print Mortgages cannot offer tax advice, so please do seek advice from an appropriate body.
What are the risks?
The value of your investment can go down as well as up – unforeseen structural problems could prove very expensive. However, if you pick the right area and property, the risk is reduced.
Rental income can vary: if the market is saturated in property to rent, the rental could remain static or even fall. You will need a plan in place for when the property may remain empty between leases.
A common fear of potential investors is the time they may have to spend sorting out problems but a decent agent can take care of everything, from finding tenants, checking references, managing infantry and dealing with maintenance problems. There will be a cost for this service though.
Agents can also assist with tenancy agreements. Most lenders require you to have a six month, assured short hold tenancy agreement with your tenants. You may struggle to arrange a mortgage if you’re planning on letting to students or irregular tenancy periods, such as holiday lets or company lets. Some lenders also will not allow DSS tenants.
Buy to Let as part of your Investment Portfolio
Buy to lets can work well as part of your investment portfolio. Whether you will receive both an income and final lump sum from your investment depends on the size of your initial deposit and the level of your mortgage payments. If the market is over-supplied or mortgage rates rise, you could even find yourself having to take a loss on your property – hence looking at the long term plan of your investment.
If you already have an extensive investment portfolio, it is often best to speak to us about how a buy to let property might fit in to this portfolio. If you already have invested in a buy to let as part of your long term investment strategy, the adviser can insure you’re paying a competitive rate of interest.
The key point to remember is that buy to let is a long term investment – you shouldn’t invest in property for any short term gain.