Whether you are new to the renting market or are an experienced landlord, buying a property to rent can be a great decision to make. As well as providing you with additional income, letting a home gives you security and an asset.
At Fisher Wrathall, we have years of experience helping people to find the right properties. Our blog this week is a complete buy to let guide, giving you all the information you need to know.
What is Buy To Let?
BTL or Buy to Let is the process of purchasing a property for the sole purpose of renting. In most cases, the rules around the mortgages are more or less the same as a residential purchase. Recently new rules and regulations have been put into place making buy to let more difficult than it used to be, including Stamp Duty Land Tax rises.
Although, it is still an incredibly good investment to make. Demands for rented houses and flats are high, especially amongst the younger generations. Rental yields may have fallen, but it is still worth looking into whether the move is right for you.
Mortgages and Who Can Get Them
In some cases, buyers will use cash to finalise a house purchase. However, most will need to secure a mortgage. When buying to let, the process and cost are different. For example, fees, deposits and interest rates typically rise above the normal levels. The amount of deposit being put down can also be a contributing factor with a lender, but this is nothing new. The more you can put down, the more attractive you look and the better the deal offered. Sometimes, a minimum deposit could be anywhere between 25% and 40% of the properties value.
There are some key circumstances that qualify you for a buy to let mortgage. These include:
- Affordability: you are able to make repayments and understand the risks
- Credit Score: your record is good and isn’t stretched too far
- Looking to Invest: whether this is a house or flat
- Under a Certain Age: lenders have upper age limits, normally around 70 or 75
- Homeowners: that you own a home either outright or with a mortgage
- Income: earning more than £25,000 a year is an indicator or what lenders are looking for
You can find out more about whether you can afford a mortgage using the Money Advice Service’s Mortgage Affordability Calculator. Lenders also have their own versions, so it is worth using these as well.
Borrowing and Where to Go
There are a few things that you need to remember. On top of fees, interest rates and deposits being higher, a large proportion of buy to let mortgages are interest only. This means that you won’t pay anything each month until the end of a mortgage term. At this point, you would need to repay the full loan amount. There are however still options for repayment mortgages, which is why it is important to shop around.
BTL mortgages usually need the proposed rental income to be around 25 to 30% more than the mortgage payments. Most estate agents will be able to give you an idea of potential income. You can also visit Rightmove to find out more about the local market and how much properties have recently sold for.
For those who are new to BTL mortgages, it’s a good idea to seek advice and guidance. As with residential cases, any advising, arranging, lending and administering is covered and regulated by the FCA (Financial Conduct Authority). Other helpful sites to visit include:
About Stamp Duty and Other Taxes
Back in April 2016 a change was made to the amount of Stamp Duty paid on Buy to Let properties in the UK. Landlords are now responsible for paying an extra 3% which is why you need to consider this cost. The amount paid varies depending on the value, rising alongside residential percentages.
There are also a few other aspects that you need to consider, including taxes. These include Capital Gains Tax as well as Income Tax. The way that mortgage interest tax relief works is also changing. In the past you could deduct all interest on your mortgage from the rental you received prior to any payment of tax. However, from 2020 this will be replaced by a 20% tax credit for the entire amount. Prior to that date, the amount you can deduct is being reduced by 25% each year. For the year 2019/20, 25% of interest payments are eligible for tax relief and 75% are eligible for 20% tax credit.
What are the Benefits?
Adding up all of the financial aspects of buying a property to rent up can be daunting. Although, that doesn’t mean it isn’t worth it. One of the largest benefits is that you will have a long term investment and be able to bring in additional money. Even though the property market has been fluctuating, having a house is still a worthwhile investment. This means when it comes to selling, you should increase the value.
For more guidance on buy to let properties and to see what’s on the market, do not hesitate to get in contact with us.
Find our current properties for sale in Lancaster and Morecambe here. If you have any questions, do not hesitate to get in touch.