Buy to Let Mortgages

What are Buy to Let Mortgages?

Buy to let mortgages are a form of residential investment where you buy a property, usually with the aid of a mortgage, and rent it out. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties and there has been a modest recovery in the private rented sector since then. The increased availability of loans at attractive rates of interest for buy to let mortgages has also increased the appeal of owning rental property.

When you buy a property to let out, you are becoming a landlord. And owning investment property is not like owning your own home. Instead you are effectively running a small business.

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Buy to Let Mortgages

The theory of buy to let mortgages is very simple: individuals purchase property that they then let out to tenants, either on a long-term or a short-term basis that will, at the very least, cover the mortgage payments and hopefully will generate a regular income.


Personal debt and poor credit ratings are very common in modern times and lenders have varied their attitude to mortgage applications over recent years. Before the 1990’s the cost of adverse credit mortgages was high and the fees associated with them was high too. Before the credit crunch the market grew and since the credit crunch lenders are reticent about lending to people with poor credit histories.


Different Buy to Let Mortgages Markets - An Overview


There are a number of different markets open for buyt to let mortgages and the buy to let investor including commercial opportunities and holiday lets. The main focus of investment is residential properties. If you are planning a portfolio of properties it is worth considering more than one market sector. There are fluctuations in any property sector and by having a diverse range of properties you are likely to mitigate the lows in one sector by balancing them with stability in another sector.


Standard Residential Lettings


A standard assured short-hold tenancy is the basic residential tenancy agreement, it is normally either six or 12 months in duration but may be any term specified in writing by both landlord and tenant. At the end of the term of the agreement the contract is considered to ongoing, the notice period for termination is determined by the regularity of payment. For example if rent is payable weekly then one week’s notice is given.


Student Lettings


There are certain differences between standard residential lettings and student lettings, the student let is normally 10 months and rooms may well be let out individually as opposed to the property being let as a whole. There are pros and cons for this approach, letting individual rooms will generate higher revenue but if rent for one room is not paid then the remaining occupants of the property are not liable for it. There are also always voids in payment for two months of the year.


Any property with more than four individual rooms being let independently will be classified as a house of multiple occupation, which requires certain criteria to be met and licences to be obtained.


Holiday Lettings


Considerably more work is required for holiday lettings as an investment than for any other type of buy to let property. The change of tenants can easily be as frequently as weekly and there is a lot more paperwork to be completed. As an incentive there is favourable tax treatment a good returns for a frequently occupied property.


Commercial Lettings


Commercial lettings are usually done on a long-term basis and give guaranteed stable returns, commercial lettings can last for decades. Despite these advantages, commercial lettings are still not very popular, usually because they are much more dependent on the economic state of the country and often require specialist commercial knowledge which many buy to let landlords do not possess.


Those who have larger debt issues may have to look at the sub-prime market in more detail. There are now several lenders that specialise in offering an adverse credit mortgage quote, but these generally come at a higher cost and if it is possible either to wait until you can use a traditional lender or until you can improve your financial position, this could save you thousands in the long run.


Considerations When Taking An Adverse Credit Mortgage


Adverse credit mortgages always cost more than traditional mortgages because they reward the lender for taking a risk on someone with financial problems. The interest payments are usually higher and there may be higher arrangement fees. The fees, rates and amounts payable should always be clearly documented and available. In 2004 the Financial Services Authority started regulating the mortgage market and as a result many of the more unfair aspects of the adverse credit mortgage market were cut away.


If you are getting advice from an independent financial adviser or mortgage broker it is worth checking how they are paid, they will be paid by the lender but they may also charge you a broker fee.


An adverse credit mortgage should be considered to be a short-term arrangement. After a certain amount of time, if you have kept up payments, your credit rating will be significantly better and it will be time to consider a more traditional mortgage. The sooner you can switch mortgages the more money you will be able to save with a more cost-effective mortgage.


Funding a Buy to Let Investment: Mortgage Types


The first thing to be considered is getting a mortgage, without buying you can’t let!


Buy to Let Mortgages


Buy to let mortgages are a specialist product offered by some lenders, it usually requires a higher deposit and the interest rates are usually higher than for a standard residential mortgage. It is not possible to use a standard mortgage for letting out a property because it would breach the terms of occupancy and under those circumstances the lender could withdraw funding.


Restrictions with Buy to Let Mortgages


As a general rule, a larger deposit will be required than for a traditional residential mortgage, it is usually around 15 to 20 percent it will also be necessary to prove to the mortgage lender that the rent will cover in the region of 125 percent of the mortgage payments.

Some mortgage providers will offer services especially tailored for investors who have growing portfolios. Many providers will only finance lending for up to 5 properties, whereas others will allow any number of properties, but will place a maximum total value on the portfolio. It is not easy to predict your future borrowing needs as your portfolio grows but it is best to give yourself as many options as possible at an early stage so that you remain flexible later on.


Alternative Financing


There are a number of alternatives to buy to let mortgages, a property syndicate spreads the risk and each investor is only required to provide a relatively small portion of the full investment. Another method is to re-mortgage your home although this is financially quite risky. There are also a number of high cost short-term options such as loans and credit arrangements but these should be approached with caution and are usually a last resort.


Getting Started with Buy to Let mortgages


A new buy to let investor will usually start with one property not a complete portfolio and this is a good idea. Managing a rental property can be a lot more difficult than it first appears to be from finding tenants to coping with all the paperwork. The buy to let property should always be treated as a business and success or failure will depend on your ability to run a small business.


Practical Considerations


The first consideration will be the amount of time and money you can invest in the property. In terms of time the biggest consideration is who will manage the property. Property agents can manage all aspects of the rental from vetting tenants to day-to-day management, these services clearly reduce the amount of time you need to invest but will also reduce the profit from the property. You may choose to manage the whole project yourself or use a limited set of agents’ services.

Holiday lets produce a higher yield but are usually very labour intensive, and once again it is possible to employ a management agent to run the entire process. The management costs however, will be much higher than in a standard rental situation, and can significantly affect profitability.


Financial Buy To Let mortgages Considerations


There are a number of subjects to think about before purchasing your buy to let property and the priority of some will change depending on your reasons for investment. If you are interested in regular income the one of the most important factors will be the ratio of rental income to mortgage payment. If, on the other hand, you are interested in the capital growth of the property then the type of property and it’s location will be a higher priority. Whatever your reasons for the project the following points should be considered:

Regular Costs of a Buy to Let Property


While the initial costs of buying the property are usually the highest there are regular costs associated with any property, if these are not taken into consideration then you run the risk of losing a portion or even all of the profit associated with your investment.


Additional Costs for a Buy to Let Property


In addition to the costs of regular utility bills, for which the tenant is liable, there are other expenses to be met. Initially the property may need to be furnished, there are costs for white goods which, if included, will appeal to a larger number of potential tenants.

There are also expenses for which the tenants are liable but which you may wish to include in the rent, these could be water charges and council tax. Although the tenant is liable they may prefer a fixed monthly cost and not to have to worry about an additional bill. It may be more expedient for you to know that it’s been paid so that if a tenant defaults you will not be fined for non-payment.

Insurance should be viewed as an essential expense. The two main insurances that you should be maintaining are buildings’ insurance and public liability insurance. This will cover you if the property has a structural problem such as fire or flooding and will also cover you if your tenants are injured in your property and try to claim compensation from you, as the landlord.

Buy to let investors should budget for the following expenses:

Basics of Growing a Buy To Let Portfolio


If your buy to let property is successfully making you a profit it is a logical step to invest in another. This is a decision that needs careful consideration, while you will have learned many valuable lessons from the first property and the process of actually buying and managing the property should be easier. Managing the finances and practicalities of a portfolio requires a different set of skills to focussing purely on one property.


Why Grow a Portfolio


One of the main reasons for growing a portfolio is to spread the risk associated with unexpected costs such as not having tenants in a property. For example in the case where you have one property and it is unoccupied not only do you make no profit but you are still liable for the mortgage. However, in the case of owning ten properties where that same one is not occupied the profit will be reduced but the mortgage is covered by the other nine properties.


When to Grow a Portfolio


As a rule it will be worth waiting a year before getting a second property. You are likely to need another mortgage or remortgage from your lender and after about a year your credibility as a borrower will be better, the property will have gained capital value against which to borrow and you will have encounter most of the more common issues associated with buy to let properties. The choice to expand your portfolio will probably be dependent on your lender agreeing to additional financing.


How to Grow a Portfolio


In much the same way as having a larger portfolio spreads the risk of lack of profitability of a single property a diverse portfolio will spread the risk of fluctuating rental property market trends. If you have a residential let then instead of another residential property perhaps consider a student let.


Tax Implications of Buy to Let


As your portfolio grows there will be tax implications associated with greater revenue from your properties. The taxes will need to be budgeted for and are:

Income Tax


Rental income is taxable as income and therefore comes under the same tax rules as your salary or wages. It is simply added to any existing income you get and the tax brackets are calculated in the same way.

There is some good news, not all of your rental income will be taxable, as certain expenses can be deducted from the income before it is used to complete the tax calculation. These include: interest payments on the mortgage, up to 10 percent for replacement furniture in a furnished buy to let, maintenance costs, letting agent fees, accountant’s fees and repair and maintenance costs.


Capital Gains Tax


Capital gain on a property is defined as the sale price minus the purchase price, purchase expenses, sale expenses and any taper relief and indexation allowances. Once this is calculated the remaining figure is added to any other income and taxed at the relevant rate. The allowance before counting capital gain as income is £9,600 for each individual, therefore if a property is jointly owned you will each have £9,600 before being taxed.

A furnished holiday let is considered as a business asset and as well as the potential 75 percent reduction, the maximum tax rate will be 18 percent, making this a huge plus for a furnished holiday let investor. In order to be considered as a furnished holiday let, the property must be located in the UK, furnished, let out for a period of at least 70 days and available for letting for at least 140 days per year. No single let can last more than 31 days.


Sourcing Tenants for a Buy to Let Properties


All the planning in the world will not make your buy to let venture a success unless you have good tenants who pay the rent regularly. Poor tenants, in some cases, are a worse problem than no tenants, not only will they sometimes not pay but may cause costly damage and put off other potential tenants.


Choosing Your Tenant


There are a number of different ways to find tenants depending on the type of property or tenancy you have.

Professional let:

Although you may not get the same amount of rent advertising through companies the payment may well be more regular and guaranteed.

Student let:

By using these advertising opportunities you can be certain that your tenants will be students although it will not guarantee payment or the condition of the property at the end of the lease term.

Using an agent to locate tenants has several advantages, as they will perform the necessary background and credit checks on your prospective tenants. They will also take and hold a suitable deposit which can be used to carry out any necessary repairs, at the end of the tenancy.


Alternative Ways to Guarantee Rent


There are insurance policies available to guarantee rent in the event of non-payment by a tenant. Typically premiums are about 3-4% of the annual rent and they are tax deductable.
Letting a property to people on housing benefit will guarantee rent if the payments are made direct from the DSS


Buy To Let Landlord Restrictions and Considerations


The Landlord and Tenant Act 1985 is the primary legislation that governs the landlord’s responsibilities and obligations, you should be familiar with its contents as a landlord and even more so if you will be managing the property yourself.


What Repairs are the Landlord's Responsible


The landlord is responsible for the following items:

Unless the tenancy has a length of more than 7 years, the landlord is responsible for the repairs and maintenance of the property as above.

Any other repairs that may be necessary may be negotiated between landlord and tenant and a landlord can legitimately ask for a contribution towards other repairs, if the tenant is responsible for the damage incurred.


Gas and Electrical Appliances


Under the Gas Safety (Installation and Use) Regulations 1998, the landlord must ensure that all gas appliances are in good working order and that the appliances are serviced by a registered CORGI specialist, on an annual basis. Evidence of this servicing must be given to the tenant, within 28 days of the check being completed.

As a landlord, you must maintain the safety of the gas and electrical appliances in the property. This is often overlooked and the amount of servicing required by a landlord is considerably higher than for a standard owner occupied residential property.


Fire Regulations


All furniture and furnishings supplied must comply with the Furniture and Furnishings (Fire) (Safety) Regulations 1988. Most furniture will be labelled for compliance with these requirements.


Future Popularity of Buy to Let


Research shows that 39 percent of people rely on property to enhance their savings in later life. At present, only 20 percent see this added income coming from their own property. This suggests that although individuals recognise that property holds the key to future wealth, it will not necessarily come from their own family home. Although the credit crunch has slowed the market down when the economic situation improves the market should pick up.


Finding a Buy to Let Hotspot


In terms of profitability and to exploit good business opportunities the location of your buy to let purchase should be considered carefully. For most tenants there is a requirement to be close to work, schools, shops and transport links. There are other less common but no less valuable indicators for a good location; an area of upcoming development or a new bypass being built. Following the local or national news will give pointers to these sorts of opportunities as well as financial and property news sources for changes in economic matters such as grants available and changes to tax law.



Buy to let mortgages are not typically regulated by the FSA


Commercial Mortgages and Buy to let mortgages are not typically regulated by the FSA


We do not charge a fee for mortgage advice. A fee based option is available of typically 2% of the mortgage amount.
For example on a loan of £25,000 the fee would be £500

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