We have put this together to inform you of the extra factors to consider when becoming a landlord, as well as the important information you’ll be required to know before you begin your journey of investing in property.
What does Buy-to-Let mean?
A Buy-to-Let mortgage is specifically sold to those who are looking to purchase a property as part of an investment, rather than as a place to live.
What type of mortgage do I need for a Buy-to-Let?
As with all property purchases, the Buy-to-Let mortgage market can be difficult to navigate through if you’re starting out.
The large majority of investors who are looking to take out a mortgage on a Buy-to-Let property will often opt for an Interest Only mortgage. This means that only the interest is paid against the loan as it accrues monthly, and typically from the proceeds of the rent collected from the property. The full mortgage amount is then paid at the end of an agreed term. This can be done by either selling the property or taking out a mortgage to cover the remaining amount.
If you’re uncertain about any aspect of choosing a Buy-to-Let mortgage, you can get help from one of our experienced advisors. Find out more about our mortgage services here.
Your Buy-to-Let property may be repossessed or a Receiver of Rent may be appointed if you do not keep up with your mortgage repayments.
How much deposit is required for a Buy-to-Let mortgage?
Differing from the usual 10% deposit required to secure a standard residential mortgage, Buy-to-Let mortgages tend to require a deposit of at least 20-25% of the property value. The rates of interest available will differ depending on the amount of deposit available to put down against the property. Typically, the larger the deposit you're able to put down, the more likely you'll be offered better rates from the lender.
Affordability rules for landlords
As with all new mortgages, the lender of choice will be required to run through a series of affordability factors with the applicant. Your personal circumstances will affect the amount you are able to borrow, as well as your rental income. Lenders will usually have a requirement that your rental income exceeds the monthly mortgage repayment on the property.
Rental Yield
As a landlord of a Buy-to-Let property, there are many things which you are required to be aware of. One of the major pieces of knowledge to get an understanding of is ‘rental yield’.
Rental yield is known as a measure of the return on a property investment. There are two different types of rental yield - gross and net.
Gross rental yield
This is calculated by dividing an entire year’s rent by the purchase price of the property, and then multiplying this by 100. As an example, if you purchased your property for £250,000 and receive a monthly rent of £1,500 (12x £1,500= £18,000) then your rental yield will be: (18,000 / 250,000) x 100 = 7.2%
Net rental yield
This is calculated by taking the annual rental income minus costs associated with owning the property. This sum will differ depending on the monthly costs.
Overall, the net rental yield is often a better option, as more information is taken into account before the percentage is generated.
Rental Yield can be affected by different factors, such as -
- Property prices
- Interest rates
- Rents
- Tenant demand
There are also measures which can be taken to encourage a rise in your rental yield, such as allowing tenants to have animals and modernising your property. Both factors have seen tenants open to paying a higher monthly rent for the property.
Choosing the right property
As with all property purchases, finding the right property in the right location is of high importance. When going down the buy-to-let route, this remains equally as important. Before you begin your property search, it is recommended to think about the type of tenant you are looking to attract with your property. The tenant-type will play a crucial part in the property you purchase. As an example, if you are wishing to rent out your property to students, an affordable property which is close to nightlife and the university will be more appealing. Whereas families will more likely be looking at properties with a garden and potential homes which are close to local schools.
If the property type doesn’t suit the tenants in the area, you are likely to struggle to fill your property. This could then lead to a reduced rate of rent versus your monthly buy-to-let mortgage repayments.
How do I choose where to buy?
If you are not going through a letting agency regarding managing the property maintenance, purchasing a property close to home could be considered an easier option. This way, you are on-hand should you be required to attend the property. Also - having knowledge of the local area can be favourable, especially to those who are renting from out of the area.
However, going through a letting agency will allow you to look further afield at more in-demand rental areas. But bear in mind each individual agency will have fees attached for using their services for your Buy-to-Let needs.
Tax Implications on Buy-To-Let property
As soon as you start renting out your property, you have an obligation to let HMRC know and to report your rental income to them annually.
As renting out your property will entitle you to receive a monthly income, you may be required to pay tax as a result of this.
You may also need to fill in a self-assessment tax return. This can be reported on the GOV.UK website - https://www.gov.uk/renting-out-a-property
Stamp Duty
If a property is purchased with the intention of renting it out, then a higher rate of Stamp Duty Land Tax will apply. In England and Northern Ireland, the percentage paid will vary depending on the property value. This can be calculated on the GOV.UK website - https://www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro
Landlord responsibilities
As a landlord of a Buy-to-Let property, there are important responsibilities that come with renting out your home. While some responsibilities may seem time consuming and expensive for a small task, these tasks should not be overlooked. As the tenants are required to uphold their part of the contract, it is equally as important the landlord adheres also should you wish to avoid being in breach of contract.
The contract which is held between landlord and tenant is commonly referred to as a short or long hold assured tenancy agreement. Each party named on the contract will have their requirements, rights and responsibilities outlined.
As well as an agreement between landlord and tenant, the government also has provided six landlord responsibilities.
An overview of the requirements are as follows:
- Keep the rental property safe and free from health hazards
- Ensure all gas and electric equipment is safely and correctly installed and maintained at all times in the property
- Ensure an Energy Performance Certificate is provided for the property
- Protected deposit for the tenant in a government-back scheme
- Ensure all right-to-rent checks are carried out on the tenant prior to renting out the property
- A checklist is provided to the tenant covering "how to rent”
The full breakdown and information regarding each requirement can be found here: https://www.gov.uk/renting-out-a-property
Insurance policies for Buy-to-Let
Although there is no legal obligation which requires a landlord to take out a dedicated insurance policy, it is recommended. Landlord insurance enables the protection of not only the landlord, but also the property and tenants. The majority of lenders will usually request you obtain a specialist landlord policy to cover rental activities.
There are a wide range of insurance options available to landlords, including property owners’ liability insurance and contents insurance, as well as buy-to-let buildings cover if it’s preferred for tenants to cover their own contents. Buy-to-let insurance policies are specially designed to offer cover on a bedroom-rated basis, and further options such as legal cover and rent arrears.
Here at Choice Mortgages, our advisors are available to listen to your needs and requirements. We will tailor a package to meet all of your insurance needs without a fee for advising or arranging your new policy. Find out more about our insurance services here.
How Choice Mortgages can help
Here at Choice Mortgages, we aim to make your time as a landlord as smooth running as possible, by providing expert advice from our experienced advisors to help achieve the best possible outcome for yourself and your tenants.
If you are thinking about investing in property and becoming a landlord for the first time and require advice before doing so, we are here to assist you.
