Your Guide To Buy To Let
What Is Buy To Let?
The theory of buy to let is very simple: You purchase residential property, flats or houses, and let it out to tenants, either on a long-term or a short-term basis that will, at the very least, cover the running costs.
Driven by the rising concern over the poor performance of pensions in the last few years, the buy- to-let market became a way for people to start taking some control to plan for their retirement.
Buy-to-let investors tend to fall into one of two categories: those aiming for maximum capital growth and those wanting an income.
Historical data shows that residential property in the UK tends to double in value every 10 years on average. This is dependent upon location. Currently the rental market is very strong as first-time buyers find it more difficult to buy, they are renting.
Despite the recent fall in property prices, buy to let property is still seen as a good long-term investment for increasing capital or generating an income.
Buying With Buy To Let Mortgage
Once you decide to get involved in the buy-to-let market, the first thing to consider is a buy to let mortgage. There are still a wide number of lenders willing to lend for buy-to-let mortgages, but the credit crunch has restricted the criteria.
As with a home mortgage, lenders are mainly concerned with your ability to repay the mortgage. Each lender imposes their own specific conditions on whether they will lend, so it's a good idea to get mortgage advice to see what options are available to you.
Buy To Let Mortgages - Rental Cover
A key factor affecting your ability to obtain a buy-to-let mortgage is rental cover. This is the extent to which the expected rental income from the buy to let property exceeds the interest payments on the mortgage.
Typically lenders want 125% rental cover eg if your monthly rental income is £500, the monthly mortgage payment cannot be more than £400.
Again not all lenders use the same calculation ... some want 135% cover, others 100%. Others may even allow a combination of other income and the rental income.
When calculating the rental cover, remember that most buy to let mortgages are interest only mortgages, so your rental income should be 125% of the monthly interest payment.
Buy To Let - Loan To Value
Currently, the interest rate for buy to let mortgages is greatly influenced by the loan to value.
In other words, the smaller the deposit you invest in the property, the higher the interest rate. A few years ago 85% loan to value LTV was the norm. Now few lenders are offering 85% LTV buy to let mortgages ... and if they do fees can be quite high ie 2.5% arrangement fee and 5.99% interest rate.
Put in a 25% deposit or more and you get better interest rates - currently one of the cheapest is less than 3% - plus the arrangement fees may be less onerous.
Buy To Let - Business Costs
Before investing in a buy-to-let property, you should consider all the costs, not just the monthly mortgage cost.
Other costs that will eat into your rental income are:
- Letting agent fees - usually plus VAT, which can add an extra 20%. In addition, they charge set up fees, and an administration fee when the tenant renews or a new tenant moves in
- If you decide not to use a letting agent, there could be advertising costs plus your own time in finding tenants, managing the property and collecting the rent.
- Void periods - it's wise to have 2-3 months' rent extra in case your property is empty for any time
- Service charge and ground rent in the case of leasehold properties
- Maintenance and repairs
- Accountant's fees
- Tax - if you make a profit on the rental income, you may be liable for income tax. In addition, there may be capital gains tax when you sell.
- Landlord's insurance - an insurance product specifically for landlords to cover against damage caused by tenants and potential loss of rent
Many people believe that being a landlord is an easy role. However, as you can see, there are many factors that need to be taken into consideration. You should do your research carefully to make sure that you can comfortably afford the commitment.
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