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Buy-to-Let Mortgages

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Buy to Let Mortgages at Trinity Finance in Welling, Bexley by Emma Frost

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    If you’re considering buying a property as an investment to rent out to tenants, you need a buy-to-let mortgage. This type of mortgage is secured against the property and tends to be more expensive than a standard residential mortgage. The key difference between the two is that the amount you can borrow is usually based on your anticipated rental income rather than solely taking your salary into account. 

    Obtaining a buy-to-let mortgage is much harder as the criteria you need to meet are stricter but, at Trinity Finance, we’re here to help you throughout the process. We can check your eligibility for a buy-to-let mortgage and ensure you’re aware of the costs involved. Our mortgage brokers can also guide you on your responsibilities as a landlord, what to look for in an investment property and other considerations before proceeding with a buy-to-let arrangement. 

    How does a buy-to-let mortgage work?

    Buy-to-let mortgages are usually offered on an interest-only basis. This means that you pay the interest on the mortgage loan each month but you don’t repay any of the capital. The loan itself is repaid at the end of the mortgage term. This can be achieved by selling the property and repaying the loan using the sale proceeds, using savings that you’ve accumulated during the mortgage term or by refinancing to a new deal, which preferably has more favourable terms. 

    Landlords generally prefer an interest-only deal as this keeps the monthly payments lower. Interest rates for buy-to-let mortgages are usually higher than the rates for standard residential mortgages as they’re considered to be more of a risk for lenders. 

    How much can you borrow?

    The amount you can borrow for a buy-to-let mortgage depends on the expected rental income, how much deposit you can pay and your personal circumstances.

    Your deposit

    Lenders expect you to pay a higher deposit for this type of mortgage, with 20% of the property value usually being the minimum requirement. As with any mortgage, the more deposit you can pay, the better the rates will be. If you can pay a deposit of 40%, you’ll be offered more deals with the best rates.

    The rental income

    The affordability requirement for a buy-to-let mortgage takes the anticipated rental income into account. Lenders usually expect this to be at least 25% higher than the monthly payment for your mortgage although some lenders insist on a rental income that’s 45% higher than this amount. Many lenders look at your earnings as well. 

    Your personal circumstances

    As mentioned above, some lenders require evidence of your earnings as well as the profitability of renting out the property. This is often defined as a minimum annual salary requirement, such as £25,000. You also need to have a good credit rating and usually need to own your own home although some lenders will agree to buy-to-let mortgages for first-time buyers. As well as these factors, lenders also set an upper age limit for buy-to-let mortgages, such as 70 or 75 years old. This is the maximum age you can be at the end of the mortgage term rather than when you apply for the mortgage. 

    A portfolio landlord

    If you’re already a portfolio landlord – meaning you own four properties or more as a landlord – the affordability checks are different. When applying for additional finance, you need to provide the lender with the mortgage information, cash flow projections and business models for each of the properties you own. Some lenders also set restrictions, such as the maximum number of properties that you can have in your portfolio. Typically, this maximum is set at 10 properties. Another restriction that can be set is the loan-to-value (LTV) ratio, which can apply across your entire portfolio. As an example, the lender may state that your whole property portfolio has a maximum LTV ratio of 65%.

    Being a landlord

    Buying a property to rent out to tenants can be a good investment both in terms of the property’s value and your rental income. The latter should cover your monthly mortgage payments and hopefully provide a bit extra for you to save as a cushion. With a bit of luck, the property’s value should increase over the years and give you some profit in the future. 

    However, being a landlord isn’t easy. It’s a time-consuming role that can often be challenging as well as expensive. You may face issues within the rental market or unforeseen maintenance problems and there are numerous administrative and tax issues to consider. To be a successful landlord, you must be completely focused on the task and work hard to return a profit.

    Plan ahead for rental voids

    It’s likely that you’ll experience times with rental voids. This can be due to gaps between tenancies, leaving the property unoccupied and you without any rental income. You may also find it takes a while to market your property and get your first tenant. Further down the line, you may encounter problems with your tenants not paying their rent. You need to be financially prepared for any of these issues as your monthly mortgage payments still have to be met. Ensure that you have adequate savings to cover at least a few months of your mortgage payments in case you find yourself in this position. 

    Be prepared for maintenance issues

    You also need to have a buffer to pay for any maintenance issues. As the owner of the property, you will be responsible for its general upkeep but you need to allow for large maintenance costs as well. For example, the boiler may need replacing or the roof may unexpectedly start leaking and need repairs.

    Your tax liability

    As a landlord, you are liable to pay tax when you buy the property, each year it is rented out and when you eventually sell the property.

    • Stamp duty. When buying a property as a buy-to-let investment, you have to pay an extra 3% in stamp duty on top of the normal rate. In Scotland, you pay an extra 4% for your Land and Buildings Transaction Tax.
    • Income tax. The first £1,000 you earn in rental income is your tax-free property allowance. After that, you need to pay tax on your rental income and are required to declare the amount you have received after allowable expenses on your annual Self-Assessment tax return. 
    • Capital gains tax (CGT). This is payable on the profit made when selling your property. You can reduce this bill by offsetting other costs against it, such as the estate agent’s fees, solicitor’s fees, stamp duty costs and property improvement costs. You have an annual CGT allowance, which can be combined to increase your tax-free capital gains if you’re selling the property as a couple. 

    Some landlords prefer to set up limited companies to enjoy tax benefits. Our financial advisers can offer further guidance on this so give us a call on 01322 907 000 to discuss this in more detail. Alternatively, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form and we will reply to you with more information as quickly as possible.

    Determine what sort of landlord you will be

    You can either take a hands-on approach as a landlord or step back and allow a property management company to deal with the nitty-gritty on your behalf. If you have the time needed to devote to a landlord’s role, you can work closely with your tenants and handle every aspect that renting out your property entails. On the other hand, you may wish to pay someone to handle everything for you, particularly if your property is located in a different area to the one you live in. Although you have to factor in the extra costs for this, a managing agent can save you a lot of time and stress, with many landlords believing that this service pays for itself. A property management company can:

    • Find you good tenants. They will advertise your property in the rental sector, conduct property viewings, take references and carry out credit checks on any prospective tenants, collect the deposit from each new tenant, organise the inventory and deal with the tenancy agreements.
    • Handle the rent collection. Each month, they will collect the rent on your behalf and also deal with any issues that may occur, such as a shortfall in the rent received or late payments that need to be chased. 
    • Liaise with your tenants. The managing agent will be on hand to answer any queries your tenants may have but will also act on your behalf should any problems arise. The agent can carry out regular property inspections for the benefit of both parties.
    • Deal with maintenance issues. Property management companies form good relationships with contractors. This ensures that any maintenance issues are dealt with quickly, which not only prevents problems from getting worse but also ensures your tenants are happy and you maintain a good relationship with them.
    • Look after the legal aspects. There are numerous legal responsibilities you have to fulfil as a landlord. These can include fitting and testing smoke alarms as well as carbon monoxide detectors in the property, having a gas safety certificate, providing an Energy Performance Certificate, checking that your tenants have the legal right to rent your property, ensuring that all electrical equipment is safe for use, only providing furniture that complies with the fire safety regulations, complying with the rules for a House in Multiple Occupation (HMO), if applicable, and many more legal requirements. As the regulations continually change and penalties for non-compliance can include fines and imprisonment, it can be a huge relief to employ a managing agent to ensure you have met all of the legal obligations.

    Unless you are a portfolio landlord and can rely on a sufficient income from your rental properties, it’s likely that you’ll have a full-time job as well as your rental property rather than solely operating as a landlord. This means that you won’t have a lot of time to devote to being a landlord and the support you can gain from the services of a managing agent can be essential for a successful rental venture. If you prefer to use the services of a property management company, we will be happy to recommend one to you. We work closely with letting and estate agents throughout Kent, London and Edinburgh so can advise you of trusted managing agents in the local areas.

    Additional costs to be aware of

    We’ve already detailed the initial costs when purchasing a buy-to-let property, such as your deposit and the stamp duty, as well as ongoing costs, such as maintenance costs, income tax and a managing agent’s fees, if applicable. There are also various other costs to consider before proceeding with your buy-to-let arrangement:

    • A valuation fee
    • The lender’s fees, which can include the arrangement fee and a booking fee
    • The survey fee
    • Your solicitor’s costs
    • Landlord and buildings insurance
    • The cost of furniture if you choose to rent out a furnished property

    How to find a suitable buy-to-let property

    When you’re choosing which property to purchase as your buy-to-let investment, you need to remember that you won’t be living there and will be taking on the role of a landlord. Therefore, you need to think about a property that is attractive to tenants rather than a property you wish to live in. 

    Get advice from a local agent

    Speak to a letting agent for help with your property search. With in-depth knowledge of the local areas and property market, they will be able to provide guidance and information on what each area offers, the most likely tenants to live in those areas and the rental income you can expect to achieve.

    Research your preferred area

    You may have settled on an area that’s close to you for convenience but if you’ve decided to buy a property that’s further afield, make sure you carry out adequate research on that area. Check whether there are good transport links, the types of amenities available and if schools are located nearby. Find out what the crime rate is like and contact the local council to ask if any projects are planned in the future that may affect the area’s appeal to tenants. Research the types of tenants living in the area, such as young professionals, students or families, and the types of properties that those tenants favour. 

    Consider the rental market in your chosen area

    When you’ve chosen a specific area, research the rental market in more depth. Check the rents achieved for properties similar to the type you are considering and compare the fees charged by different agents. You need to ascertain that there’s adequate demand for rental properties in the area and whether that demand will increase in the future.

    Does the property need work?

    Tenants have high standards so you need to ensure that any work needed on your property has been finished before you advertise it. You’re aiming for trouble-free tenancies and one of the best ways to start a good relationship with your tenants is to make sure the property is in good condition. The lender will also take the property’s condition into account when deciding whether to approve your mortgage loan so bear this in mind when viewing properties.

    Will the property be furnished or unfurnished?

    A letting agent can advise you on whether tenants in the area you’ve chosen tend to prefer furnished or unfurnished properties but there are other factors to think about. For a furnished property, you not only have the cost of the furniture but need to ensure it complies with safety regulations. You also need to take out landlord contents insurance for protection against damage to your appliances, furniture and furnishings. 

    Secure a buy-to-let mortgage for your investment opportunity

    The prospect of becoming a landlord may seem daunting despite the appeal of receiving a rental income. However, as long as you’ve chosen a good property in the right area, planned ahead for any maintenance issues or empty periods, complied with all of the legal requirements for rental properties and adequately vetted your prospective tenants, you should benefit from a profitable investment.

    At Trinity Finance, we’re here to help you with your buy-to-let mortgage no matter what your circumstances are. You may be looking forward to a new start as a landlord or be an experienced landlord with a portfolio of properties. You may be a first-time buyer and need guidance on every aspect of buying a property. It could be that you’ve inherited the property and need advice about the inheritance tax or you may wish to buy a new home while renting out your existing one via a let-to-buy arrangement.

    Whatever your buy-to-let mortgage, tax and insurance needs, our experts – located throughout Kent, London and Edinburgh – are ready to offer you impartial advice and find the best solutions for your circumstances. Just give us a call on 01322 907 000 to speak with a specialist consultant. Alternatively, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form and one of our friendly advisers will reply to you as quickly as possible.

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