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Buy To Let Mortgage

Want to be a landlord?

If you are considering becoming a landlord, there are many things you should consider. This guide will hopefully help you make an informed decision on what to do when investing in rental property and the buy to let market.

The term buy to let relates to buying a property with the aim of renting it to a tenant. For people who already own their property and are keen to let it out, it is important to get in touch with your mortgage broker because you may need to re-mortgage the property.

We know that some people think acting as a landlord is a wonderful way to make money but there are many challenges and difficulties in the rental market. There are risks, there are many administrative and tax issues to consider and the market is very well regulated. You need to ensure that you are focused on the task and that you work hard to return a profit as a landlord.

Being a landlord is a time-consuming role and it can be expensive. You should have long-term aims and you need to fully understand the importance of finances as a landlord. You need to know what your budget is but you also need to know what your tenants are looking for from you.

A great starting point comes with setting investment goals. There is a high demand for rental property and some areas and homes offer a high rental yield. However, it is vital that you know what you want to achieve and then you should set plans to achieve these plans. Don’t forget that in addition to generating income each month through rent, you can benefit from capital appreciation, as the value of the property rises.

In determining the expected return for your investment as a landlord, the two main things to aim for are:

1. Rental yield
2. Capital appreciation

Some landlords focus on one aspect more than the other, but it is worthwhile knowing what both elements offer.

Rental yield

This is the return you get from property with respect to the rental perspective. In comparing rental options, the rental yield informs you of what should be the most lucrative. To obtain the rental yield, you divide your annual rent by the property value, and then you multiply this figure by 100 to obtain a percentage return on your investment. It is possible to obtain a return of around 5 to 10% if you know what you are looking for.

An example of how to calculate rental yield can be seen below:

Your investment = £210,000
The annual rent = £18,000
The annual costs = £10,000
Your net annual income = £8,000
£8,000 / £210,000 = 0.038. 0.038 x 100% = Rental Yield of 3.8%

Capital Appreciation

Capital appreciation refers to the value with which property increase over time. It is impatient to be aware that properties can depreciate in value too, but the percentage increase of the property represents the return on your investment.

How to choose the right property when you buy to let

Don’t forget that when you buy to let, you won’t live in the property, you are the landlord. Therefore, don’t think about a property you wish to live in, think about a property that would be attractive to tenants.

Some steps to consider include:

Speak with a local estate agent

A local agent knows the area and the market. They will be able to provide you with guidance and information on what an area offers, who the most likely tenants are and what you can expect to achieve in this market.

Consider the rental market in a chosen area

If you have an area in mind, consider the rental market in depth. Look at rental fees, try to find out the competition in the market and whether there is help available for landlords.
Determine what sort of landlord you are going to be
Are you going to be a hands-on landlord? You may wish to be a landlord that works closely with tenants or you may wish to leave this to a property management firm. The amount of time you can devote to the role will have an impact on what landlord you should be.

How do you want to furnish the property?

There is a big choice to be made between furnished and unfurnished property. There is also the cost of presenting a furnished property, so make sure you weigh up these elements when letting the property

Know your budget

This should be considered at the very start, but it never hurts to continually review your budget and your financial expectations. Many landlords find that small costs add up and the expense of being a landlord can run away from them before too long.

Obtaining a mortgage

You will find that a buy to let mortgage is different from a residential mortgage and lenders look for unique features before they grant a loan.

Lenders are keen to see the rental income of the property being between 125% and 165% of the interest repayments. The figure for you will depend on your circumstances and financial status. All lenders carry out a “stress test” on applicants to ensure they can maintain payments, even if interest rates change or the market becomes challenging. There is also the fact that interest rates associated with buy to let mortgages are normally higher than standard mortgages.

You will also probably need a larger deposit with many buy to let mortgages requiring a 15% deposit. The bigger the deposit you can offer, the more choice you will have in mortgages you can select from.

Even if you are confident about the condition of your rental income, lenders look at other aspects, including your property portfolio. Obtaining a buy to let mortgage is challenging, so make sure you are ready for a difficult application process.

Additional costs associated with buy to let

There are many costs associated with buy to let, including:

  • Mortgage fees where the lender charges applicants to arrange a mortgage. This can be paid off upfront or added to your mortgage but if you add it to your mortgage, this will increase the interest you have to pay
  • Survey fees where the condition of the property is evaluated. The lender will require a basic report for their needs, but it is always best to have an extensive report carried out on your property.
  • Repair work is an ongoing fee for landlords to consider. While many of these charges will be unexpected, it shouldn’t be a surprise that landlords need to maintain and repair property, so it makes sense to put money aside to deal with these issues
  • Building insurance is a necessity with buy to let property and you will likely need specialist landlord insurance too
  • Management fees are required if you pay a professional letting agent to manage your property on your behalf. While this is an expense, many landlords believe this is a service that pays for itself, helping them to save a lot of time and being able to obtain a greater return from tenants

Taxes involved with buy to let

There are many taxes that are connected to buy to let property and it is essential that landlords are aware of these:

Stamp duty

When buying a rental property, it is likely you are buying an additional home, and you will have to pay an additional 3% when buying this property.

Tax relief

As of April 2017, there was a change to tax relief that landlords can enjoy and by 2020, all landlords will have to pay tax on their entire rental income. There has also been the removal of a wear and tear allowance, and presently, landlords are only able to claim for the value of furniture bought during a year.

Capital Gains Tax

Anyone who sells their buy to let property at a greater price than they paid for it will have to pay capital gains tax on this profit.
Anyone who has made significant improvements to their property is advised to offset the cost of these improvements to minimise the tax they may later have to pay.

Inheritance tax

Many people become landlords when they inherit property, but inheritance tax applies. Individuals are entitled to a tax-free threshold which stands at £325,000 while anything above this level is taxed at 40%. For married couples or people who are in a civil partnership, the threshold is £650,000.

Can you set up as a limited company?

In order to enjoy tax benefits, we know that some landlords set up as a limited company. This is an area where we can offer further guidance so please get in touch to talk about this service in more detail.
Using a letting agency

Only landlords who have an extensive range of property can generate sufficient income to work only as a landlord. Therefore, it is likely that many landlords, perhaps even yourself, will have a day job. This means that many landlords don’t have a lot of time to act as a landlord, and this means support is needed to be a successful landlord.

Turning to a letting agency or property management service provider makes sense but beware that this is a cost you need to consider.

However, many landlords believe this is a sensible expenditure as the benefits on offer outweigh the cost and more than justify the expenditure.

Some of the areas letting agents offer assistance include:

• Advertising the property effectively
• Finding tenants
• Vetting tenants
• Arranging all legal documents
• Collecting rent and then providing the landlord with their share
• Carrying out an inventory check
• Play the role of a mediator when problems arise
• Organise maintenance and repair work to be carried out

Understand your responsibilities as a landlord

As a landlord, you have a number of responsibilities, mainly regarding the safety of your tenants. You need to provide an energy efficient rental property and you need to ensure that the tenants’ deposit is properly cared for.

Gas safety certificate

Your rental property must have a gas safety certificate and the property must be checked by a Gas Safe registered engineer. A gas safety check must be carried out every 12 months and your tenants should receive a certificate stating the property is safe.

Electrical safety check

As of yet, there is no need for landlords to obtain an electrical safety check for a property, but this may change soon. Therefore, it is best landlords remain fully informed of this area of regulation and that they take steps to ensure their home is of a suitable standard when it comes to electrical safety.

Smoke alarms

Landlords have been required, since 2015, to ensure there is at a minimum of one smoke alarm on every storey of their rental property. Also, any room which has a solid fuel burning appliance must have a carbon monoxide detector in place. These alarms must be in working order.

Energy Performance Certificate

The rental property must hold an E rating, or higher, with respect to the EPC. A failure to meet this standard will see landlords fined if they let the property.

House in Multiple Occupancy (HMO) license

There have been changes to the HMO requirements, and there will be further changes in 2019, so landlords must ensure that they remain up to date with the new regulations. If you need guidance in staying up to date with the latest regulations, contact us and we will be more than happy to assist you.

Deposits

You are required to place your deposit into a deposit protection scheme that is authorised by the Government. This scheme protects both landlords and tenants and will act as a mediator if issues arise at the end of the tenancy period.

You must put your deposits in a government authorised, deposit protection scheme. The tenancy deposit scheme is designed to protect tenants and landlords by acting as a mediator in the case of a dispute at the end of a tenancy.

If you want to act as a landlord, ask yourself if you have the time to provide the service tenants expect and do you live close enough where you can attend at short notice or regularly without it becoming an inconvenience for you. You also need to think about whether you like dealing with people. If you don’t, perhaps being a landlord is not for you because the role involves considerable dealings with people.

Being a landlord is difficult, but it can be lucrative. If you are looking for guidance in being a landlord. Get in touch and we will be more than happy to assist you.

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