Buy To Let
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate on Buy to Let Mortgages.
This genre of mortgage business is an ever evolving market and the main considerations for a lender in determining whether your application would be successful might be:
- Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rental income receivable and the length of any tenancy agreement. In some instances, earned income is not taken into account and in others it may be used as an additional income stream when there is a shortfall in rental income being received (Top Slicing).
- Whether you are identified as a Regulated BTL client.
- Whether you are identified as a Consumer BTL Client or a Portfolio Landlord?
When buying a second 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 from the second property if it increases in value over time? The decision may affect the type of property you purchase, and the location.
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 145% of the rental property's interest only mortgage repayments in order to cover your costs should anything go wrong. However, although some lenders have moved their criteria to stress testing at these levels, it is still with some lenders to achieve stress testing at 125% of rental cover.
These additional costs include:
- Property upkeep - maintenance costs for the property.
- Letting agent's fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
- Ground rent / service charges - applicable to leasehold properties.
- Legal insurance - to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
- Insurance - building insurance and contents insurance for the items provided as part of the rental agreement.
- Furnishings - the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
- Gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
- Decorating costs - the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
When choosing a property to let, it is wise to take advice from local letting agents to determine; what types of properties are in need and which parts of the town are best or most wanted. They can tell you if there is a University in the town, and if students are looking for somewhere to live.
The taxation of buy to let income changed with effect from April 2017 and by 2020, you won’t be able to deduct any of your mortgage interest payment from your rental income before paying tax – instead, the entire sum of your interest payment will then qualify for a 20% tax relief. To understand how this may affect you, please ask your CDMB Adviser for further details.