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A buy to let mortgage is a loan for purchasing a residential property with the specific aim of letting the property to tenants in the private rented sector.
The property itself is an investment asset on which the investor aims to earn a rental return and achieve capital gains as property prices rise over time.
The Buy-to-let market has been affected by tax changes recently, meaning extra stamp duty on purchasing a buy-to-let and changes to the ability to offset all buy-to-let mortgage interest against income tax.
However, if you are considering taking out this type of finance there are some things to consider. Buying a property to let is a specialist area and very different to buying a home for yourself.
To begin with, it is a good idea to speak to letting agents in the area in which you are looking to buy your rental property, to find out if there is a demand for rental properties there, and how much income you can expect. The agent should be able to tell you the most popular types of properties to let and areas for tenants.
Whatever your reasons are for buying to let, you will want to make a return on your investment. You will therefore need to know what factors may have a positive or negative impact on your investment. There is no guarantee on the level of investment return you will receive. The type of property, furnishings, tenant, agent and economic conditions all affect the level of rent achieved.
What are the risks?
Demand for rental property can fluctuate and, of course, the value of your property could fall or rise. If rental demand falls then you may have periods where your property remains empty. There could be other reasons why you may not be able to rent your property, for example, if the rent is set too high or the location is wrong.
What tenants are acceptable?
Lenders will want to know what types of tenants you intend to let your property to, how much rent they intend to pay and how long the tenant will be renting the property for.
Lenders generally accept tenancies of between six and twelve months. You or your letting agent (if you have one) will arrange for the tenant to complete an Assured Shorthold Tenancy Agreement (AST) for the length of time they wish to rent. The terms within the agreement will protect both parties. You may wish to seek legal advice about the clauses contained in the tenancy agreement.
In general terms, acceptable tenants are employed persons, couples and families.
Some lenders will not lend to landlords who have Department of Work and Pensions (formerly DSS) tenants or students because the risk is different and generally higher, bear this in mind when you are researching the availability of mortgages.
How do I find a tenant?
Most lettings agencies offer a service to find tenants. They will advertise your property, conduct viewings and undertake referencing of prospective tenants. Once the contracts are signed, you can take over management of the tenancy, or you can sometimes pay a letting agent to also do this for you. If you ask an agent to manage your property, they should be a member of ARLA (Association of Residential Letting Agents).
You will normally pay 10 to 15% of your gross rental income to a letting agent to manage your property but they will know the local rental market, help you find suitable tenants, draw up tenancy agreements, collect rent and notify your lender if tenants change. Read our Six reasons to use a letting agency article for further ways in which agents can help.
Which properties are acceptable for letting?
The property you choose must be suitable for letting, in an area where there is a good demand for rented property. Lenders have different criteria for the properties they deem acceptable to lend against, here are some tips on what to ask the estate agent:
- If the property is a flat, is it freehold or ex-local authority – this may restrict your choice of lenders.
- Multi-occupancy properties – these properties are typically let to students and not every lender accepts this.
- Leasehold properties – confirm the length of the lease remaining, this can restrict the future saleability and whether it is acceptable to your chosen lender.
- Any property rented out will have to have a minimum EPC rating of E.
What are the tax implications?
We cannot advise you on this as we are not specialists and the tax implications will depend on your particular circumstances. Rental income is taxable. We advise you to get professional tax advice from a tax specialist.
Is there anything else I need to know?
You need to be aware of your legal responsibilities as a landlord. This includes repairs to the property, compliance with fire safety regulations and the safety of gas and electrical appliances. You will need to ensure you have adequate buildings insurance in place.
You may also want to take legal advice on landlord and tenant law to familiarise yourself with the dos and don’ts of letting a property. We advise you to read the Buy to Let Guide produced by the Council of Mortgage Lenders (CML). If your mortgage payments are not maintained, your lender may appoint a receiver of rent.
Other useful sources of information for landlords are: