A Guide To Buy-To-Let Mortgages

Thinking about becoming a landlord? Taking on a buy-to-let property is not a licence to print money. It can be a risky proposition and is a lot of hard work but in the right circumstances it can pay off. We take a look at some of the things you’ll need to think about to make your buy-to-let portfolio work for you.

Consult a buy-to-let mortgage specialist

If you’re considering investing in buy-to-let property it’s worth contacting a specialist mortgage broker even before you start the process to get the best advice. A good mortgage advisor can talk you through the options and costs and help you decide if becoming a landlord is really for you.

A buy-to-let mortgage is designed specifically for landlords. Generally, the difference between these and residential mortgages is that they tend to demand a larger deposit and the interest rates also tend to be higher.

To secure your buy-to-let mortgage you will need a deposit of at least 25% and ideally 40% in some cases to get the best deals available. What’s more, bear in mind that the rental income on a buy-to-let mortgage will need to cover 125% of the mortgage payments for a basic rate tax payer.

Access to mortgages and loans for over-55s can come with challenges. Speak to our mortgage experts Fluent Money who are on hand to give you the best advice. Book a free call now.

Work out the potential rental yield and capital growth

To help you decide whether a possible buy-to-let is a good investment you need to consider the potential capital growth and rental yield on the property. Capital growth is how much your property could rise in value over a certain period, for example, you may purchase it for £400,000 but once redecorated it could be worth £450,000 on the local market. In this case, the capital growth would be £50,000. Rental yield is the ongoing percentage you can make in rental income on the property each year. So, for example, if you were able to charge £2,000 in rent per month on the same £400,000 property, the rental yield would be 6% a year. A good rule of thumb, according to industry experts, is to have a gross rental yield – before costs – of 7%.

Stamp duty, income tax and maintenance fees

Depending on the value of your property, you could also have to pay stamp duty on it and an additional 3% surcharge as it’s not your main residence. Your income will also be liable for income tax although you get a £1,000 allowance and certain costs are tax deductible. You should also consider the maintenance fees you might have to pay out for cleaning, boiler services and repairs if something goes wrong.

Letting agents

Will you operate the lettings yourself or will you use an agent to do so? If it’s the latter you will need to factor in costs of around 15% of your rental income which may eat into your profits. You can save money by taking on some of the tasks yourself but a good letting agent can be useful and remove some of the day-to-day hassle of being a landlord.

Location, location, location

Think carefully about the area you decide to go for and the type of tenants you wish to attract. Is it a university town and are you thinking of renting your property out to students or are you aiming for young professionals or families? It’s important to match your offering to the market and it’s best to pick an area that you know inside out. If you mean to invest in a property that isn’t close by, bear in mind that you might want to check on it regularly even if you use a letting agent.

“Consider the type of tenant you are after [and choose them carefully],” says Daniel Payne, managing director of Fluent Mortgages. “Your tenants are important. If you have a bad tenant it can take six months to get them out. Some landlords prefer to have professionals.”

Furnished or unfurnished?

Professionals may be expecting a higher standard of décor or mod cons, however, you may find you need to redecorate more frequently if you rent out your property to students, for example. In any case, it’s important to buy in the best location you can afford, says Payne. “I’d rather have the worst house on the best street, than the best house on the worst street,” he explains.

Tenants such as students may be expecting a furnished property but professional people may have their own furniture. Bear in mind that you will most likely need to invest in white goods, however.

Personal or company structure?

Depending on your personal circumstances, you might want to consider a limited company structure – also known as a special purpose vehicle – if you plan to hold multiple buy-to-let properties. While it involves more paperwork because you have to produce annual accounts and pay corporation tax, there are benefits in terms of ensuring that your capital gains and inheritance tax liabilities are well managed. Family members can come on board as shareholders and money can also be paid into a pension fund, reducing the corporation tax liability.

“With a limited company you assign the shares and you can pass it on to family members,” explains Payne. “But if it’s done personally there are capital gains tax implications. So it’s dependant on [your] age, income and taxation and how [you] would like to structure things [plus your] pension income and tax situation. The additional income will have to be declared and there’s the potential inheritance liability.”

Make sure you’re insured

It’s also vital to have good insurance cover and your lender is likely to demand it. “Take out adequate insurance,” warns Payne, himself a landlord. “It covers you for rental voids and vandalism.”

Depending on the contract you have with your tenants, you could also require contents insurance as well as buildings insurance.

Running a buy-to-let portfolio isn’t easy money but it can be rewarding if it is right for you and you are prepared to put in the hard work. Always get as much advice as you can before taking on mortgage finance or securing a loan on your home.

Written by Piper Terrett, Fluent Money Group