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Buy to Let: The Mortgage Provider Online Guide
The British have always been in love with the idea of property ownership. As equity growth has been sluggish since the dot com crash of the nineties, people have increasingly looked towards property as an investment. Buy to Let can be a great way to grow your assets in a rising property market and provide an independent income. Done badly, however, it can spell financial disaster.
As with any investment, there is an element of risk. There are, of course, ways to mitigate this risk and below are the Council of Mortgage Lenders and the Association of Residential Letting Agencies guidelines for anybody interested in making a Buy to let investment.
Contents
Click below for a shortcut to each section:
Choosing a property
Research your market
You should carefully research the market where you want to buy your property. You can either do this yourself or employ a specialist letting agent to help you find the area and property you are looking for. If you research the market yourself, you will need to gather information from estate agents, local papers, local employers and even the local authority, about the demand for and supply of, rented housing.
Finding your tenants
You will also want to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements from the home they choose to rent? It is important to remember your property should have features that are attractive to would-be tenants, rather than would be would-be purchasers.
Choosing your location
You should look at how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school age children, how close the nearest schools are, will be an important influence on where they choose to rent.
Choosing your properties size and condition
Equally, you should think carefully about buying a property whose size is attractive to households looking for rented accommodation in that location.
As well as the size, type and location of your property, what about its condition? Have you assessed whether the property will require expensive maintenance. Generally speaking, older homes require more attention.
Obviously, the size of mortgage you can afford will have a major influence on the size and location of your property… And finally, in considering how much to spend on a property you should bear in mind that as well as increasing in value, your property can also fall in value.
Managing Your Property
Your responsibilities
- Finding Tenants
- Checking Tenants references
- Collecting the rent and maintaining the property
- And dealing with problems
Your legal responsibilities
- Carrying out repairs
- Ensuring the safety of gas and electrical appliances
- And ensuring that the furniture and furnishings meet fire safety requirements
When your property is empty
You should remember there may be periods when you are unable to find tenants for your property and it will be empty, with no rental income coming in. Obviously you will still be expected to continue repaying your mortgage so you will need to think about how you will meet your mortgage repayments in these circumstances. This could particularly apply if you choose a property in an area where the supply of rental property exceeds demand from tenants.
Maintaining your property
As well as managing your property, you will be responsible for maintaining it. Besides repairs and regular maintenance, properties can benefit from routine improvements which maintain their attractiveness with would-be tenants. You may find that your property is in need of an overhaul after a tenancy finishes. Naturally, you will have to finance this yourself. What is more, your property is likely to be empty and you will not receive a rental income, while your property is being improved
Using a managing agent
Given the number of different responsibilities you face as a landlord and the limitations on your own time, you may wish to use a managing agent to look after the property for you. This will cost you approximately 10 – 15% of your monthly rental income
Choosing a mortgage
Paying for your property
Obviously, when you choose a property, you will need to ask yourself how much you can afford to pay, and how will you pay for it? If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow. Typically lenders allow people to borrow up to 80% of the properties value. The size of the loan is usually linked to the expected rental income. As a guide, you lender will expect your monthly rental income to be 25% - 50% greater than your monthly mortgage payments.
Your choice of mortgage
When you choose a mortgage, your choice will be between a repayment mortgage or an interest only loan. With an interest only mortgage, some lenders may require you to have a suitable investment product. If you have a repayment mortgage, some lenders may also advise you to arrange life assurance alongside your loan.
You may be able to choose between fixed rate and variable rate mortgages. Fixed rate loans will give you some certainty about your mortgage repayments whilst variable rate loans could move up or down. You should also remember that your mortgage payments could rise if interest rates rise depending on the type of mortgage you have.
But before choosing your mortgage, you should consider taking advice from your lender or a mortgage intermediary.
What will your costs be?
As well as your mortgage payments, you will need to pay for -
- Buildings Insurance
- Consider contents cover, if your property is furnished
- Maintenance costs
- Periods when you are receiving no rental income because the property is empty or the tenants have fallen behind with their payments
Your tax liability
Before you can calculate what your income from your property will be after taking into account all necessary expenditure, you should recognise that the profits from renting property are taxable. However, you will have to pay the following taxes –
- Income tax
- Stamp Duty when you buy your property
- And Capital Gains Tax when you sell it
Please visit the CML or ARLA’s website if you need more information.
This information is intended for use in the United Kingdom (UK) only.
All information contained within these pages is for general information only and should not be considered ‘advice’.
If you are thinking of consolidating existing borrowing you should be aware that you will be extending the term of the debt and increasing the total amount you repay.
Think carefully about securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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