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How to buy to let: Getting a mortgage and becoming a landlord

06th April 2018

Many homeowners dream of the day that they can become a landlord. Having struggled onto the property ladder against bleak news of rising house prices and impossible deposits, the security brought about by being a landlord as well as a homeowner is certainly welcome. Not only does buying a property to let open up an additional source of income, it also puts you on track to join the ranks of the landlord millionaires. If you want to get started, we’re here to offer you some buy to let advice.

Who knows, a portfolio comprising a slew of properties could be just around the corner. But you may be wondering how to buy to let. While there are similarities to purchasing and mortgaging your own home, there are a number of tips, warnings and some mortgage advice for you to consider before taking your first step on the rental ladder. 

 

Top tips

Decide if buy to let is right for you

Although property is often touted as a foolproof investment by its strongest adherents, that simply isn’t the case and it may not be the investment right for you. When building up a property portfolio, be aware that you’ll find yourself tying up a substantial amount of cash in an investment that does have the potential to decrease in value

Furthermore, when investing in property, it is likely that you will have to take out a large loan in the shape of a mortgage to pay for your investment. Taking out a mortgage sets you up for a big loss if the property falls in value, making buying to let a potentially risky investment.

Despite the risks, if you feel that property investment is for you, there is a chance for a great payoff. Rental properties will not only generate a monthly income but can also hold substantial value. If house prices rise and your rental property increases in value, you could find yourself with a considerable amount of profit.

 

Research locations and tenant groups

Many landlords are most comfortable buying to let in their local area. Being familiar with other landlords, local house prices and rental costs, along with knowing which postcodes are desirable, makes renting locally an ideal solution. Despite this, you may be better looking further afield.

The best locations tend to be those where you can buy to let a property to one of the three dominant tenant groups: students, young professionals and families. To appeal to students, look for areas with a large university. For young professionals, commuting is key. Families will find homes near schools to be the most appealing. Renting to each of these tenant groups has its own pros and cons, and it is ultimately up to you in regards to which type of tenant you would most like to rent to. It is perhaps most important to keep the location of your rental property in mind as, if it is purchased in an undesirable area for tenants, you may find yourself unable to fill it.

 

Aim for a good yield

Rather than moving quickly to secure a more luxurious property that you may find yourself unable to pay the rent on when times are tough, you should value the properties you buy based on their yield. A property that, in a year, can make back around 8% (or more) of its total value in rent is ideal. You should also be aiming to make at least 125% of the property’s mortgage payments in rent. In fact, many lenders won’t even offer you a mortgage unless the rent is able to cover at least 125% of the payments – but more on that later.

 

Getting a buy to let mortgage

Who is eligible?

First and foremost, to secure a mortgage for a buy to let property, you’ll almost certainly have to be a homeowner already before lenders will consider offering you a loan. This doesn’t mean that you have to own your home outright. A mortgaged property is fine, but you shouldn’t expect to be granted a buy to let mortgage if you live in rented accommodation.

Aside from owning a home, you’ll also need to be earning at least £25,000 per year before most lenders will see you as viable. With two mortgages to pay, as well as covering costs when there’s no tenant in the property, lenders will want to be sure that you have an income large enough to make payments on time.

 

Differences from a standard mortgage

Buy to let mortgages are a specific kind of loan that differ from standard residential mortgages in a number of ways.

Higher fees and interest rates, as well as a higher initial deposit, are most likely to be the biggest differences you will find between a standard mortgage and a buy to let mortgage. Mortgage fees can be as much as 2.5% of the entire mortgage, making just one fee cost as much as £5,000 for a £200,000 mortgage. Regarding a deposit, while some residential mortgages now offer loans equalling 95% of the property’s value (or even higher), BTL mortgages usually require you to put down at least 25%, or even up to 40% of the full value of the property as a deposit.

Another major difference between buy to let and standard mortgages is that BTL mortgages are usually interest only, meaning that you will not pay off the cost of the property while paying the mortgage. Of course, this means that when your term is up you’ll have to pay off the entire mortgage, covering the full value of the property.

 

How much can you borrow

The amount you are able to borrow through a buy to let mortgage depends on how much rental income your lender predicts you will generate. As we previously mentioned, lenders will often expect your rent to cover at least 125%-130% of the monthly mortgage repayments, giving you a buffer zone to save for periods when the property is empty.

To work out what the predicted rent would be in a certain area, talk to letting agents and local landlords, but be sure to check rental prices online or in local media too. While you won’t have to give this information to the bank yourself, it would be useful to work out predicted rental income when deciding on a location in which to buy a rental property.

 

Where to get a buy to let mortgage

Most large banks will offer buy to let mortgages, while there are also a range of specialist lenders who deal only in the buy to let markets. Specialist lenders may offer more competitive rates for landlords as they provide a service more focused on their situation.

Whether you opt for a large bank or a smaller specialist, it is always worth consulting a mortgage broker before committing to any major financial decisions. Our buy to let mortgage advisors at IMC are always happy to help prospective landlords enter the world of buy to let. It’s worth remembering that, whenever you are dealing with large financial decisions, you should always take the time to seek professional advice.

 

Warnings

Plan for when things go wrong

Be prepared for when things go wrong. It’s the best advice anyone can give you when you buy to let. A rental property will face issues that you’re unlikely to face in a standard residential property.

Remember that at times it is likely that your property will become empty. Whether they leave at the end of their contract and you fail to fill the property, or if they are evicted, you will still have to make the mortgage payments while not receiving the income you expected to receive. As such, you need to have the money set aside to cover the rent when things go wrong. It’s not inevitable, but most landlords have been in this decision at least once.

There is also the possibility of having to pay for major repair works in a rented property. If, for instance, the boiler breaks down, it is the landlord’s responsibility to ensure that it is fixed. These repairs can be expensive, so always budget for these kinds of unexpected major bills.

Landlord insurance is an option for those worried about how to deal with situations such as this. Similarly to mortgage payment protection insurance, many landlord insurance policies will pay out in the event that you are unable to fill a property or in the event of any major repairs you are required to undertake. This ensures that your buy to let mortgage payments will be covered in the event of an emergency.

 

Remember you’ll have to pay off your mortgage

As the majority of buy to let mortgages are interest-only, you’ll need to pay off the entire cost at the end of the mortgage term. You shouldn’t rely on selling the property to do this, as it is possible that house prices could fall, meaning that you would be stuck with what could potentially be a substantial loan to pay off. In the same way that you should budget for missed rent or unexpected bills, having a fallback plan to cover the cost of paying off your mortgage is very important.

 

Remember the tax

Nobody likes it, but there is often heavy taxation involved when purchasing a buy to let property. If you sell your rental property for a profit, you’ll have to pay capital gains tax on whatever you earn from the sale of the house or flat. Furthermore, while renting it out, any income that exceeds the mortgage payments required will also be subject to income tax.

It’s also worth remembering that, when buying to let, the stamp duty is 3% higher than it is for non-rented properties. So be sure to include that in your calculations when working out how much you can afford to spend on a BTL property.

 

For more buy to let advice, whether it’s regarding getting a mortgage or insuring yourself for when things go wrong, get in touch with IMC today. Our friendly team are here to help you get the most from your rental properties.

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