Understanding a Buy-to-Let Mortgage – With generation rent well and truly here those who have some money and want to invest may be looking to the property market. However, if you have never thought about it before it can be a little daunting knowing where to start, so here is a guide to a better understanding of what a buy to let mortgage is. At least then that is one less thing you have to worry about.
First things first, with the competition high for rental properties there is more profit to be made in the market, this is good news for landlords although it does mean that tenants are forced into the rental market for a lot longer. As a result make sure that when it does come to set your rental price it is fair for both parties whilst being in line with average rates across the local market.
What is a buy-to-let mortgage?
If you are a first time landlord then it is important to understand how a buy-to-let mortgage works; a buy-to-let mortgage is simply money offered by a lender, usually a bank or building society, which is then used to purchase a property that the owner will not be living in. The difference between applying for a buy-to-let mortgage or a residential mortgage is the way in which the income of the borrower is assessed. For a buy-to-let mortgage the potential rental income is taken into account although all lenders will have different ways of assessing this so it is important to compare deals.
The potential earning is likely to be assessed by a third party too and it will need to meet at least 125 per cent of the interest payment needed each month. The reason for this is so that landlords and the lender will be protected during any void periods. Those who are most likely to get a buy-to let-mortgage are those with large deposits, usually the minimum is 30 per cent and sometimes even 40 per cent. If you have a lower deposit, the interest rates will be higher so it is always worth checking what is better for you long term.
As a starting point for your property aim for a 5 per cent return each year, however there are some properties that may even get 7 per cent a year.
Tenants
Once you have your property it is now important to find the right tenant as this can make all the difference. You also need to make sure you are complying with your lenders regulations as there are many who won’t accept HMOs (homes of multiple occupancy) as well as student lets.
If looking for appropriate tenants is a daunting prospect you can hire an agent who will find tenants for you. They will also look after the tenant once they have moved in along with the property itself. Although do make sure you have landlord insurance to ensure that if anything does happen you are covered. If you do want to opt for a letting agent then you will be looking to pay them around 11 to 17 per cent in fees.
If you do want to let to students you could consider turning the living room into an extra bedroom. This way you will maximise your profit through having an extra tenant. If the property you are looking to buy isn’t the most contemporary then try and do everything you can to bring it into the 21st century. Modern rentals tend to get snatched off the market very quickly and for more money. As mentioned before make sure you set a fair rental agreement as the more money a tenant pays the more demanding they are likely to be. Also when considering what property to purchase you should also consider the location too. Having a property near good transport links will also justify you charging a higher rent.
When you buy a property for residential purposes any gains that are made in monetary terms are exempt from tax. However with properties which have been purchased as a rental home tax is required to be paid on any gains, including rent. With this in mind you can opt to offset the tax against interest payments and some other costs too, including agent fees. Do make sure you have spoken in depth with your accountant before taking out a buy-to-let mortgage.
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