Buy-to-Let Mortgages Explained

November 5, 2020 7:09 am

A Buy-to-Let property is a property - it does what it says on the tin, you purchase the property with the intention of letting it out to others. In the most likely case, landlords typically purchase these properties via an interest-only mortgage loan agreement.

Whilst a Buy-to-Let mortgage has similar aspects to a standard mortgage, there are differences. To begin, with a Buy-to-Let mortgage, the amount you can borrow is hugely dependent on the money you are expected to make back on the property via rentals.

With this being the case, many lenders will require your monthly rental income to be at least 25% higher than your monthly mortgage payments. Alongside this, a higher deposit is also required for this style of mortgage.

This is a result of Buy-to-Let mortgages being riskier investments for lenders than standard mortgages.


Costs

Whether you are a first-time Buy-to-Let landlord or you have been building your portfolio for years there are many costs associated with becoming a Buy-to-Let landlord, alongside the different rules and regulations

Therefore, before investing it is important to research each aspect thoroughly, ensuring you are prepared for the commitment.

To name a few of the costs associated with becoming a Buy-to-Let landlord, you will need to organise fees for:
- Taxes
- Insurance (Rent, landlord and building)
- Maintenance
- Builders and engineers (if you are looking to renovate your property)
- Surveyors

Through your research you may find there are more costs associated with your investment, therefore, it is vital to carry out your own due diligence.




Benefits

You’ve heard of ‘as safe as houses’ right? Property is considered to be a safe investment. Although short-term, house prices fluctuate, the overall value of your property will appreciate in the long-term, giving you a valuable asset.

Recent events and circumstances have led the up-coming generation to be branded “generation rent”. Lifestyles are changing and people are not as comfortable with the commitment of buying their own home, therefore, choose to rent.

Recent figures demonstrate ⅓ of millennials are more likely to rent a property than buy, making space for your investment on the market. As long as you have reliable tenants in your property, you are guaranteed a monthly income from your Buy-to-Let.

A silver-lining of Covid-19 is the drop in house prices, alongside the reduction of stamp duty. These have acted as great positives/ incentives for landlords getting into the property industry.


Considerations for First-time Buy-to-Let landlords

Costs and Budget



As previously mentioned, there are a multitude of costs that are associated with purchasing a Buy-to-Let property. Careful consideration is needed to ensure you are equipped with the means to meet the requirements and expectations of your lender.

Failure to demonstrate you can meet these requirements will result in a knock-back.

Meanwhile, it isn’t just the one off costs of agency fees and surveyors’ fees, there are many long-term costs which must be added to your budget analysis.

As stated before, you must allocate part of your budget to dealing with repairs and maintenance of your property. It can often be difficult to forecast these costs, therefore, it is essential you hold enough budget for unexpected situations.


Rental yield



The rental yield of a property is the income of a property calculated annually - this is expressed as percentage of the purchase price to demonstrate the value of the property. By calculating the rental yield of a property you can easily determine whether the property is a worthwhile investment or not.


Location and Tenants



Which market are you looking to invest in? Are you looking to cater to lower income families, busy professionals, elderly couples settling into retirement? Each property appeals to a different market and different budgets/ circumstances.

When choosing a property to invest in, it is important to consider which market you are looking to attract. The location of your property will determine which types of tenants you are likely to appeal to.

The location of your property will also contribute to the rent price of your property. There are important considerations to make when setting rent prices - is your property near good transport links? Is there easy access to shops? Is it next to a busy road?

Your letting agent will be able to provide advice regarding these factors.


Condition



When considering a property for investment looking at the bigger picture is key. Consider your budget along with the condition of the property. The condition of the property can affect your budget.

Maintenance of your property also ensures you limit inconveniencing your tenants - keeping them happy. Regular maintenance also limits the impact of repairs on your budget over time as the likelihood of unexpected costs are reduced.

You also hold responsibility for your property to meet rules and regulations regarding residential property. Therefore, performing your own due diligence regularly is crucial.

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Purchase Price: £38,000

End Val: £57,500

Net Cash Flow: £234.22




Conclusion



Purchasing a property with the intention of becoming a Buy-to-Let landlord remains a worthwhile investment. With many opting to rent rather than buy, the demand for rental properties is greatly increasing - pathing the way for your investment on the market.

Becoming a Buy-to-Let landlord can be costly in the beginning of your investment, however, this is a style of investment that definitely pays off in the long run. By investing in the residential property market in a time where the decision to rent is becoming the norm for many you are likely to guarantee a monthly income.

Although this is a worthwhile long term investment there are many considerations to make in the beginning and throughout. Your budget is not only important in the off set, but throughout your full investment due to costs such as maintenance.

By taking your potential tenants and the location of your property into account you can increase the opportunity of making your investment successful.

In our experience, purchasing a property with the intention of letting it out can bring many positives and be a great addition to your portfolio.

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