Buy To Let Mortgages

Most major lenders now have their own selection of Buy to Let mortgages to fit a whole number of requirements. As a mortgage broker, we are able to tailor your individual requirement to the right lender, saving you a lot of time and money in the process.

Where should I start?

Even if you have no experience of property letting, don't worry! There are many useful books that have been produced with you in mind; helping the novice investor judge for themselves the pros and cons of property letting. Another useful tip is to talk to as many people as possible that have been in the business. You can also find out more from letting agents, the library and the tax office. Look out for courses that you can go on, as these are extremely informative.

What's the difference between a Buy to Let mortgage and a normal residential mortgage?

A residential mortgage is basically where you secure the loan against a property that you intend to live in as an owner-occupier. On a Buy to Let mortgage, as this is usually a second mortgage and the lender has no control over who lives there then the interest rate tends to be higher because there is more of a risk involved, this is also classed as a commercial mortgage.

In addition, until now, rental income has usually been disallowed when assessing a borrowers ability to meet mortgage payments.

Now, the view of many lenders and all other housing professionals is that growth in the private rented sector must be encouraged. Not only does it lag well behind the private rental sectors of all the other advanced economies, the lack of choice between renting and buying is, in fact, bad for the economy and a contributory factor to the booms and busts of the housing market over the last decades.

What are the returns from letting property?

Gross returns – This is the rent received before taking account of the cost of letting - such as management fees, maintenance, service charges ground rents and insurance as this can vary between 7% and 10%. You may receive even less of a gross return for very expensive properties.

The average rental return in Britain today hovers around the 10% mark, and capital appreciation is likely to match, if not exceed, inflation for the foreseeable future. As a rule of thumb, the gross rents should be 115% + of the monthly mortgage payments.

What are the benefits as a long-term investment?

There is a long-term opportunity to make stable and profitable investment returns in letting out bricks and mortar across the UK. This is true, despite high property prices, a consumer 'spending led' economy, a saturated high-end corporate rental market and an unstable Global political outlook. Proper financial and practical planning should be the focus of every property investor; not headlines about market saturation or falling rental yields in London. Remember that your mortgage payments in real terms will decrease over time but your rent will increase along with inflation and the overall value of the property will continue to increase.

What difference can a Letting Agent make?

Buying a property to let is not the same as buying your own home. Mortgage lenders will want to know that an ARLA member agent has been advising on the selection of properties suitable for letting.

The experienced agent will know the local market, whether there is a demand for say, two-bed roomed flats, or four bed roomed houses, or for properties close to schools or transport links or secluded properties with gardens. Also the agent will know the standard of decoration, furnishing, fixtures and fittings required.

Then there is the selection of well-covenanted tenants who will pay their rent on time and leave the property on time and in a proper state; and there is the management of the tenancy.

Knowing that the management of any inherent risk is in the hands of a professional agent enhances the credit worthiness of Buy-Let propositions put to mortgage lenders.

What will an agent do exactly?

An agent will introduce and vet prospective tenants; prepare the tenancy agreements; advise on and arrange inventory and condition reports and changes to utility accounts and Council Tax; collect the rent, organise the landlord’s gas safety certificate and pay the balances to the landlord's account/ set up a direct debit.

A letting and property management agent can offer other services e.g. pay bills on behalf of the landlord and regularly inspect the property, recommending, overseeing and accounting for necessary maintenance, repair and re-decoration.

Can a Buy-to-Let investment be protected?

Insurance cover is now available for rental protection, in the event of a defaulting tenant, and for legal expenses in addition to the normal building and contents insurance. We are able to provide a competitive insurance quote for this.

What other costs should be taken into account?

Letting agent's commission and management fees, Insurance (Building/Contents/Rental and Legal Expenses Cover), the costs of keeping the property in a marketable condition, service charges and ground rents - if a leasehold. (The tenant is responsible for such items as utility accounts, Council Tax and TV licence fee etc.)

What Tax will I be liable for and can I offset any allowances?

Deductions against tax on rents received may be claimed for the costs of the interest part of the mortgage, maintenance, insurance, cleaning, gardening, agent's commission and other reasonable management expenses (but not improvements).

The initial cost of furniture fittings and fixtures is not allowable, but the actual cost of subsequent replacement may be claimed; or, alternatively, a wear and tear allowance of 10% of the rents received may be deductible.

In the beginning, you may wish to employ an accountant; if you do then their costs can be offset against any tax owed.

I’ve heard that when I sell a ‘Buy to let’ property then there will be a potential Capital Gains Tax liability?

Yes this is right; your tax liability will be on any profits made on the capital (i.e. the difference between its value and the original purchase price). However, this can be complex as there are a numerous expenses and reliefs that can be deducted first (in your favour). You also have a capital gain allowance of £8200 before you are liable for any tax. Again, the tax office will be able to assist you with this or why not arrange an initial free consultation with an accountant to discuss your future accounting needs.

What do I do next?

First of all find a property you believe is suitable for renting out and find an equally suitable letting agent. The letting agent will confirm whether or not it has letting potential, the range of the likely rent that can be achieved in current local market conditions and advise on the need - or otherwise -for re-decoration and new fixtures and fittings to attract good tenants and to reduce the risk of periods when it stands empty.

The Dos and Don'ts of Buying to Let

DO

Think of buying to let as a medium to long-term investment.

Seek advice from an ARLA letting agent on local market demands.

Get your sums right. Will the rent cover borrowings and costs, after allowing for void periods?

Decorate, fit out and furnish to high quality standards, especially kitchens and bathrooms, to attract the best tenants and let quickly every time.

Use an ARLA member as your letting agent. They are bonded, hold Professional Indemnity Insurance to required standards, have staff trained to ARLA's competency standards and are kept up to date with the latest legal and regulatory requirements.

DON'T

Let personal taste cloud your judgement. Be sure the property you choose meets market requirements.

Purchase anything with potential maintenance problems like a lot of woodwork or large gardens. It will add nothing to the rental value and cost a lot to keep up.

Think that the running of an investment property to let can be left to friends or relatives in your absence. Tenants require a full management service.

Use off-the-shelf tenancy agreements from HMSO or law stationers, or forget to issue the right notices or fail to have a proper inventory and condition report made before a tenant moves in. Leave all documentation to a professional agent.

Furnish with second hand furniture or cast-off soft furnishings. These will probably contravene the Furniture and Furnishing Regulations.


Note: This section is for guidance only. The responsibility for the financial decision to Buy-to-Let can only rest with the investor. Most letting agents will not accept responsibility for the validity of investments, costs incurred or for mortgage arrangements made, although those who are also registered as financial advisers may do otherwise. It should be noted that as with any investment, returns and capital values can go down as well as up; and the investor should be fully aware of the terms and conditions applied by the chosen mortgage lender. Letting agents must present their own written terms of business for letting and managing properties.