Buy to
let mortgages are designed for those wanting a mortgage
for the purpose of letting the property out to tenants.
These mortgages have become increasingly popular over the
past few years, driven by increasing house prices, a strong
demand for rental properties and a drop in the interest
rates available to private landlords.
A wide range of buy to let mortgages are now available,
including fixed rate, discount, tracker and variable rates.
Buy to let mortgages differ to residential
mortgages in three main ways: Rent Potential - the decision
as to whether or not a mortgage will be offered is usually
based on the rent you will earn as well as your income.
In some cases your income is not considered.
Interest Rate - buy to let mortgages have slightly
higher interest rates. Larger Deposit - typically a minimum
of 20% or 25% of the property's value is required as a deposit.
Becoming a private landlord should not be seen as an easy
way of making money. It is riskier, more complicated and
more time consuming than most other forms of investment
and there is no guarantee that house prices will continue
to rise. That said, letting a second property to tenants
can reap considerable financial rewards over time.
Buy to Let considerations
When buying a property to let you will need to decide whether
your primary objective is income or capital growth. In other
words, are you looking to make a profit month on month or
are you looking to make a profit through increased equity
in the property as it increases in value over time. The
decision may affect the type of property you purchase, and
the location. For example, a prime city centre location
may be more suited to high growth.
When you manage a property there are many costs involved
in addition to the monthly mortgage repayments. As a guide,
you should be aiming to achieve a gross rent of about 130%
of the rental property's
mortgage repayments (interest only) in order to cover
your costs.
The additional costs when buying to let include:
Letting agency fees - letting agents charge around
10% of the monthly rent for finding and vetting tenants
and an additional cost of around 5% if you require a full
management service.
Ground rent / service charges - applicable to leasehold
properties.
Property's upkeep - maintenance costs for the property.
Gas / electrical appliances - cost of maintaining
appliances and ensuring they comply with any regulations.
Insurance - building insurance and content insurance
for those items provided as part of the rental agreement.
Furnishing - the purchase of any furniture if the
property is to be let furnished.
Legal insurance - to cover the costs of evicting
tenants in the event of non payment.
Decorating costs - the property may require work
ranging from painting to a new bathroom suit before it is
suitable to be let to tenants.
Buy to Let
When choosing a property to let it is wise to take advice
from local letting agents to determine what type of properties
are in demand and in which areas. The Association of Residential
Letting Agents (ARLA) state that a property 'needs to be
in the right area, close to transport and other facilities,
and in good condition'.
When choosing a letting agent to act on your behalf it
is sensible to choose one that is a member of the ARLA.
The reason is because members of the ARLA must join in a
bonding scheme to protect rent and tenant's deposits. The
bond provides total compensation of up to £2 million
a year.
There are a number of tax issues that need to be explored
in order to maximise your tax position, such as being able
to offset your maintenance costs, letting agent fees as
well as any interest paid on a buy to let mortgage against
your tax.
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