Buy-to-let mortgages are available from many mortgage lenders: banks, building societies and mortgage brokers. Many landlords use a mortgage agent or broker to find them the best buy-to-let deal.
Investing in property can be very lucrative, but it is essential that you do your homework and research the options: What type of property should you buy? Should you use a letting agent? What mortgage rates are available?
The following article is an excerpt from the Financial Services Authority regarding buy to let mortgages. This fact sheet is from the Financial Services Authority (FSA), the independent watchdog set up by the government to regulate financial services in the UK and protect the rights of consumers.
The FSA is responsible for regulating most mortgage sales from 31 October 2004. However, the FSA does not regulate mortgage sales if one or both of the following applies:
The mortgage is a second charge on your home. You are also unlikely to be able to seek redress from the Financial Services Compensation Scheme if the firm against which you have a complaint becomes insolvent.
What is a buy-to-let mortgage?
A buy-to-let mortgage is a loan you take out to buy a property which you intend to rent to tenants. The mortgage might be a second charge on your own home or, more usually, it is secured against the property to be let. It is a long-term investment which you hope will generate an income from rents and a capital gain when you sell the property.
For example, a lender might require the projected rental income to be 30% higher than your mortgage payment. Typically, you’ll need to pay a deposit of around 20% of the value of the property.
What type of mortgage can you have?
You can have either a repayment or an interest-only mortgage. If you choose an interest-only mortgage, you should think about making capital repayments when you can afford to do so to reduce the amount you’ll need to repay at the end of the mortgage term. You might feel this is unnecessary if you intend to sell the property to repay the mortgage. If you sell for a profit, you may have to pay capital gains tax. Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up, eating into – or even wiping out – your income and profit.
Buy-to-let mortgages - some risks of buy-to-let
- Costs rise unexpectedly
- Property is empty for longer than you had expected
- House prices do not rise as much as you had expected, or fall
- Poor location
- Property is in poor condition
- Bad tenants
How it might affect your buy-to-let investment
For example, the mortgage payment rises, you have to make major repairs to the property, you employ a property manager and his/her fees rise, and soon. As a result, your income and your profit are reduced. Your total rental income for that year is lower than you had expected. Either way, your income is reduced. Tenants do not want to live there or you have to spend large amounts bringing the property up to an acceptable standard. Either way, your income (and so your profit) is reduced.
Tenants may damage the property, fail to pay rent on time, or upset neighbours.
Your payments will not go up even if mortgage interest rates rises. Be realistic: when planning whether the project is feasible, build in a margin for extra costs and maintenances.
Be realistic: when planning whether the project is feasible, build in an allowance for empty periods. Consider employing a letting agent to find tenants. Do not take on a bigger mortgage than you can afford. Be aware from the outset that there is no guarantee you will make a profit when you sell the property.
Be prepared to put off selling the property so you can ride out any slump in prices. Take a repayment mortgage, so that you are paying off the loan as well as paying interest. Do your research before you buy – for example, talk to estate agents, visit and check the distance to shops, local schools, public transport. Employ a letting agent to recommend suitable properties –tenants won’t necessarily want the same type of property as owner occupiers.
Do your research before you buy – get a survey of the property– bear in mind older properties have higher maintenance costs. Employ a letting agent to recommend suitable properties and give you an idea of the rent you might expect.
Vet potential tenants, including taking up references. This lets you evict tenants on two months’ notice with a minimum of fuss. Most lenders will insist you use this type of tenancy agreement.
Further information about buy-to-let Council of Mortgage Lenders Tel: 020 7440 2255; www.cml.org.uk
Further Reading for Buy-To-Let Property
Industry experts predict 2006 will be a solid year for buy-to-let and say with the days of rocketing short-term capital growth gone, long-term investors are set to benefit.
Like any investment, buy-to-let comes with no guarantees, but for those who have more faith in bricks and mortar than stocks and shares here are This is Money's top ten tips:
1. Research the market If you are new to buy-to-let, what do you know about the market? Make sure buy-to-let is the investment you want. Your money might be able to perform better elsewhere. If you know someone who has entered the buy-to-let market, ask them about their experiences, or chat with other investors on This is Money's message boards.
2. Choose a promising area Promising does not mean most expensive or cheapest. If you are in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live?
Have a look at the rental market and homes to buy in your town on www.findaproperty.com.
Traditionally buy-to-let lenders want rent to cover 125% of the mortgage repayments, although some are relaxing this, and interest rates are higher. Will your investment work out? What will happen if the property sits empty for a month or two? Use This is Money's mortage calculator to help with the maths.
4. Shop around It sounds obvious, but people who do this when they need a financial product are one of the reasons why banks make millions in profit.
This is Money's mortgage finder, provided by our selected partner searches the market to find you a good deal. If you are looking for advice consider using a specialist buy-to-let mortgage broker. Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. If it is a family they will have plenty of their own belongings and need a blank canvas.
Read This is Money's regular property articles for tips, previous stories include makeover madness and the key to selling your home.
We have all read the stories about buy-to-let millionaires and their huge portfolios. In most places the days of double digit house price rises are gone, so experts say invest for income not short-term capital growth.
Once mortgage, costs and tax are taken into account, you will want the rent to build up over time and then be able to use it as a deposit for further investments. Use This is Money's account finder to find a suitable savings account through our selected partner.
Most buy-to-let investors look for properties near where they live. But your town may not be the best investment. Cast your net wider and look at towns with good commuting links, that are popular with familes or have a sizeable university. 8. Haggle over price
As a buy-to-let investor you have the same advantage as a first-time buyer when it comes to negotiating a discount. If you are not reliant on selling a property to buy another, then you are not part of a chain and represent less of a risk of a sale falling through. Before you make any investment you should always investigate the negative aspects as well as the positive. The general consensus is that house prices are relatively stable, but they may drop slightly or even considerably. Even in popular areas properties can sit empty. One rule of thumb many buy-to-let investors apply is to factor in the property sitting empty for two months of the year - this gives a substantial buffer. If you do not have enough in the bank to cover a major repair to your property, do not invest yet.
Read This is Money's guide to the dangers of buy-to-let.
Buying a property is only the first step. Agents will charge you a management fee, but will deal with any problems and have a good network of plumbers, electricians and other workers if things go wrong. You can make more money by renting the property out yourself but be prepared to give up weekends and evenings on viewings, advertising and repairs. If you choose an agent you do not have to go for a High Street presence, many independent agents offer an excellent and personal service. Select a shortlist of agents big and small and ask them what they can offer you.