Increased demand in the property rental sector and better legal protection for landlords has made buying a property to let an attractive investment option for many people. All the evidence suggests the buy to let market is experiencing a renaissance with figures from the Council of Mortgage Lenders showing that lenders advanced 40,000 buy to let mortgages in the second quarter of 2013, amounting to £5.1billion worth of lending.
In recent times, the number of lenders operating in the market has increased meaning there is now a much greater choice of products compared with a year or so ago. Competition is hotting up with lenders dropping rates and relaxing rental income criteria. Much cheaper two year trackers are now available and there are some products offering 80% LTV.A number of people have purchased a buy to let property as a long term investment to take the place of a pension fund.
If you are considering a buy to let investment, consulting a specialist mortgage advisor can help you find the best buy to let mortgage for your individual circumstances. We have access to all the high street lenders, plus the specialist buy to let lenders including The Mortgage Works, BM Solutions, Leeds Building Society, Precise, Aldermore, Mortgage Trust, Paragon and Platform - most of whom only take business from professional intermediaries, so you can't go to them directly.
The maximum loan to value is typically 75%, although there are some buy to let lenders now offering 80%. Ultimately, you will have a wider choice of products the larger your deposit.
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Even in the current climate, buy to let can be a good long term investment. But it's not a hobby investment, you need to ensure you know what you are getting into.
Buying an investment property is very different to buying a home for yourself. Researching the market is key. Even if you borrow a substantial part of the purchase price of the house it is likely to cost you a considerable amount to set yourself up as a landlord. Speak to letting agents in the area you want to buy to see what demand is like and to get an idea of how much rental income you can expect.
Also, make sure you've done your sums before you start. Unlike when buying your own home, mortgage lenders calculate how much they are willing to lend differently.
Most lenders expect rental income to amount to at least 130 per cent of your monthly mortgage repayments. This means you can borrow around 77 per cent of the property's expected income. Once you have completed these calculations, you can start looking at mortgages.
Many lenders offer buy to let mortgage loans worth up to 75 per cent of the property value for purchases, but it is possible to borrow as much as 80% loan to value (LTV). There are also plenty of different buy to let mortgages to choose from. The rates are higher than for residential mortgages because lenders view buy-to-let as a higher risk. You can choose between fixed, discount and variable-rate loans. But, when you choose, remember that the rental income may not rise quickly from year to year. So if you choose a discount, you need to be sure you can still make the repayments after the special offer is over or rates increase if you have no plans to remortgage.
Applying for a buy to let mortgage is much the same as applying for a standard mortgage, but on top of the usual paperwork you may be asked to provide a letter from a letting agent detailing the kind of rental income you can expect.
Some lenders insist you use an agent to manage the property. For a fee of up to 15 per cent of the gross rental income you can employ an agent to find tenants, check references and collect the rent.
Don't forget insurance either. Legally, you need buildings insurance to cover the structure of the property and make sure the policy covers buy-to-let properties. If you are providing furniture or white goods you should buy some contents cover. Legal expenses cover is another one to consider - it will cover your costs should you need to take a tenant to court.
Rental income is taxable - it will be added to your other earnings to calculate your income tax. But there are a number of expenses that can be offset against the rent you receive to reduce your tax bill, including letting agency fees, mortgage interest costs and, where the property is furnished, a 10 per cent allowance for wear and tear. If you sell your buy-to-let property, you will pay capital gains tax, usually at 40 per cent of the proceeds.
1. Don't buy in a property ghetto. If the area is already saturated with buy-to-let landlords, supply could outweigh demand which makes finding tenants difficult.
2. Build a team of reliable tradesmen who work hard and react quickly. If your relationship is good it could make the difference between keeping and losing tenants over the longer term.
3. Always offer well below market value on every property. It may seem cut-throat, but there will always be someone desperate to sell. Also, be prepared to buy tatty properties and refurbish them because increasing the value of the property should help you make more profit.
4. Decor is crucial. Make sure themes are evident throughout. Stick to neutral colours like beige; this makes rooms look bigger while light carpets encourage tenants to take more care. Be prepared to replace carpets every three to five years.
5. Join a local Landlord's Association. For about £100 a year, you'll get help with changing legislation, paperwork, tax issues and the chance to learn from others' mistakes.