Buy-to-Let Tips and Advice
Regardless of whether you are new to the Buy-to-Let scene or you are an experienced landlord, fully understanding the ins and outs of Buy-to-Let mortgages is essential when managing your property portfolio. As well as these buy-to-let tips below, we've also a dedicated area offering landlord mortgage advice.
Tell your mortgage lender
If you already have a residential mortgage, your lender needs to give you formal ‘Consent to Let’ before you can let out your property. Your decision to let may mean that you are put onto a higher Buy-to-Let interest rate.
Failing to notify your lender that you are letting out your property will put you in breach of your mortgage agreement.
Tell your insurer
Your standard Buildings and Contents insurance will not cover you if the property is to be let out. You will need to seek specific Landlord’s Insurance instead.
A Buy-to-Let mortgage operates in a very similar way as a residential mortgage. It has the same types of rates with the same kinds of fees and charges. However, a Buy-to-Let mortgage does have a few key differences.
For example, mortgage interest rates for these types of mortgages tend to be higher than those for residential mortgages on your home, and the loan-to-value (LTV) is generally lower.
One of the main changes when going for a Buy-to-Let mortgage is how your affordability is assessed. Whilst employment income, benefits and a combination of other sources are used to evaluate your ability to repay the loan, Buy-to-Let works in a different way.
Rental income will be assessed as a percentage of your mortgage payment, usually at least 125%. To explain, if your mortgage payment is £700, you would need to attain rent of at least £875.
When renting out your property, there are also different taxes that you will have to pay. Stamp Duty has to be paid on a purchase of any property worth more than £125,000 regardless, but you may also have to pay Income Tax on the rent you receive and Capital Gains Tax when you come to sell the property.
You must state your rental income on a Self-Assessment Tax Return but you can take off costs such as mortgage interest and letting agency fees from the rent before you declare your income.
Maintenance costs, annual safety checks, Landlord’s Insurance and Rent Insurance are all costs that need to be considered, even though they may not be taken into account by the mortgage lender.
There is a minimum valuation that some lenders uphold, which means that they will only lend on properties valued above a certain level. Although this is usually around £40-50,000, there are some that specify minimum valuations at a level of £100,000 and above.
There are also lenders that will restrict the number of properties you can let or the maximum amount that they will lend to you in total.
Can you profit from a Buy-to-Let?
To work out whether a property is likely to be a good investment, you need to work out all of the costs that you will incur and what the potential returns are. Start by correctly breaking down the costs included in the buying, running and selling of the property.
Buying a Buy-to-Let property
There are many costs to consider such as mortgage arrangement fees, broker fees, survey fees, legal fees and stamp duty. In addition to these, you will also need a deposit which is typically 25% of the property's value.
Running a Buy-to-Let property
The highest cost of a Buy-to-Let investment is typically the mortgage, so it is extremely important to make sure that you keep this as low as possible throughout the let. Our mortgage advisers will help you find a suitable mortgage deal for your circumstances.
The costs of selling a Buy-to-Let property
When it comes to selling your property, there are costs to take into account such as estate agency fees, legal costs and any removal fees. As a rule of thumb, selling a property costs approximately 2 per cent of the sale price where this is less than £250,000 and 2.5 per cent for any sale prices over this amount. The sale could have a Capital Gains Tax liability. To find out more about this, contact our mortgage advisers.
Calculating the investment returns
It is important that your property or portfolio is making a good return versus other types of investment. To compare how well your property is doing, you will need to calculate the return on your investment - both on an annual basis and over the time that you intend to hold the property. The return is usually referred to as 'yield'.
For further tips and advice, please contact one of our specialist advisers.
Your property may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Most Buy-to-Let mortgages are not regulated by the Financial Conduct Authority.