Buy to Let Mortgages
A MORTGAGE IS A LOAN SECURED AGAINST YOUR PROPERTY. YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY (FCA).
These types of mortgages are designed for property investors and private landlords, who do not intend to live in the purchased property.
Buying additional property for the purpose of letting it to earn rental income can be risky and complicated since there is no guarantee that house prices will rise nor that rental income will be uninterrupted.
That said, letting a second property to tenants could return respectable financial rewards over the longer term, but it's important to properly consider the risks, as well as rewards, involved in 'Buy to Let' first.
When buying a rental property, you will need to decide whether your investment objective is income or capital growth. Are you looking to cover the monthly costs and perhaps make a profit to supplement your income? Or, are you looking to make a profit later upon the sale of the property, with the assumption your property's value will increase in value over time? The decision may affect the type of property you purchase, its location, and also the risk involved since there is no guarantee that property prices will rise.
If you can't buy the property outright you will need to consider a Buy to Let mortgage. When it comes to this type of mortgage there are several differences to be aware of.
Normally a lender’s decision about whether to offer a mortgage or not, will be based on the rental potential of the property as well as your own income, though in some cases, your income may not be considered at all.
Usually, a minimum of 20% to 30% of the property's value is required as deposit, which is often higher than the desposit required for other types of mortgage, and you can expect Buy to Let mortgages to have higher interest rates applicable to them. It's worth also mentioning that, as of 1 April 2016, there is an additional 3% in Stamp Duty to pay if you are buying a second property whether as a home or for purpose of letting.
As well as mortgage costs, potential landlords should carefully consider the costs of owning the rental property itself. These additional costs may include:
- Property Maintenance. The upkeep of the property itself, such as repairs to appliances, and redecoration that may be required before a property can be let to new tenants.
- Letting Agent fees. Though it varies, letting agents normally charge around 10% of the monthly rental income for managing tenants. If you need full management of your property, it is not unusual for these costs to be much higher, typically around 15% of monthly rent.
- Ground Rent/Service Charges. These costs only apply to leasehold properties.
- Legal insurance. Say for example in the event of non-payment of rent, anti-social behaviour or damage to the property. Legal insurance can be used to cover costs involved in pursuing eviction.
- Buildings /Contents Insurance. The property will need buildings insurance, and any furnishings provided as part of the rental agreement will also need to be insured with a suitable contents insurance policy.
- Furnishings. If the property is to be let as furnished then you'll need to consider the initial cost of providing the items needed to furnish the property.
- Appliance Safety and Inspection. Certain appliances will need to be regularly inspected and serviced to ensure they are safe to use and compliant with current regulations. Examples include Gas Boilers and Gas Fires.
When choosing a letting agent to act on your behalf, it is wise to choose one that is a member of The Association of Residential Letting Agents (ARLA). All members of the ARLA participate in a bonding scheme to protect both rental income and tenants’ deposits.
PLEASE BE AWARE THAT SINCE 6 APRIL 2016 HIGHER RATES OF STAMP DUTY LAND TAX ARE APPLIED TO THE PURCHASE OF ADDITIONAL RESIDENTIAL AND NON-RESIDENTIAL PROPERTIES.
Buy-to-let property is a long-term investment which you hope will generate an income from rents and a capital gain when you sell the property. But there is no guarantee that you’ll make a profit on the investment, and if access to cash is needed then a property may take time to sell or re-mortgage.
However, it is always necessary to maintain access to an emergency fund to cover mortgage payments during ‘Void periods’ that may arise where no tenant and the property is not let.