Buy to Let Mortgages

Becoming a private landlord should not be seen as an easy way of making money. It is done by taking out a mortgage on a property in order to let the property out. However, it can be complicated and risky. As well as this it can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will rise. However, it can lead to considerable financial rewards over time and a buy to let is the way to do this.

You will need to decide whether your primary objective is income or capital growth when buying a second property to let. In other words, are you looking to make a profit month on month? Or on the other hand, are you looking to make a profit through increased equity from the second property? This works if the property increases in value over time? The decision may affect the type of property you purchase, and the location.

There are 3 main differences in Buy to Let mortgages:

  • Rent Potential – the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn. This is typically 125% – 145% of the mortgage payment. It also takes into account your income. It has now become the norm for lenders to require an annual income of at least £25k.
  • Interest Rate – buy to let mortgages have slightly higher interest rates.
  • Larger Deposit – a deposit would typically be 20-25% of the mortgage value.

In addition to the monthly mortgage repayments, when you manage a property there are many costs involved. As a guide, you should be aiming to achieve a gross rent of about 135% of the rental property’s interest only mortgage repayments. This will then cover your costs should anything go wrong.

These additional costs include:

  • Property upkeep – maintenance costs for the property.
  • Ground rent/service charges – applicable to leasehold properties.
  • Letting agent’s fees – letting agents charge around 10% of the monthly rent for finding and vetting tenants. Then an additional cost of around 5% if you require a full management service.
  • Insurance – building insurance and contents insurance for the items provided as part of the rental agreement.
  • Legal insurance – to cover costs from evicting tenants in the event of non-payment. This is very important as it can be very expensive.
  • Furnishings – the purchase of any furniture. If the property is to be let furnished ensure it is covered under your home insurance.
  • Decorating costs – the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
  • Gas / electrical appliances – cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.

It is wise to take advice from local letting agents when choosing a property to let. This helps determine what types of properties are demanded in the area. As well as this which parts of the town are best or most wanted. They can tell you if there is a University in the town, and if students will be looking for property.

Your home may be repossessed if you do not keep up repayments on your mortgage(s).

The Financial Conduct Authority does not regulate some forms of Buy to Let mortgages

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