What everyone ought to know about Buy to Let mortgages
A buy to let mortgage is a loan taken out for a property with the intention of letting it out to tenants, with the loan being secured on the property. The final aim is to get tenants to pay rent with which you cover the costs of the mortgage and once the mortgage is paid off to own the property outright. Once you fully own it you can keep it and keep renting it out to tenants and than leave it to your children or partner or who ever you find suitable, or you could sell it.
The owner is essentially the landlord, and it is quite like a business so it can be set up as an ltd, so you can actually pay corporation tax instead of capital gains. Corporation tax is usually lower than capital gains, however capital gains varies with different income levels so do your research and find out which one suits and benefits you more. Moreover, if you set up as a company you can also write off some of your costs reducing your tax payable.
The mortgage products available are similar to when you are buying your own property including interest only and repayment mortgages with various interest arrangements. The amount that can be borrowed depends on many factors including the rent available, the amount of people borrowing eg. whether its one person or more and so on. You must also be able to prove that your rental income is sufficient enough to cover your mortgage repayments.
When investing in a rental property you will have to take many factors into consideration when choosing a property, and you will also have to make many decisions which cannot simply be based on guesswork. Therefore, if you are new to this type of investment and you lack the relevant skills and knowledge, it is suggested that you talk to a letting agent. A letting agent can help you figure out the levels of demand for housing in certain areas, they’ll help you figure out what type of tenants you should take on such as single professionals and so on, the trends in property areas in that area and the likely future trends. In conclusion, they can help you find the right property and right tenants which suits you, helping you minimise risks of failure.
There are also legal considerations which you have to take into account, like ensuring you have a valid tenancy agreement which highlights your legal rights and responsibilities and the tenants. You as a landlord have a duty of care so you have to make sure that the property and the utilities within the property are safe.
How much you can borrow
How much you can borrow mainly depends on the rental income you can get from the property. You will usually also need your rental income to be 25-30% higher than your mortgage payment. To get an accurate amount you should talk to a letting agent, or you could use online tools whichever one you prefer.
How much deposit you need
You usually need 25% of the property price, minimum.
Costs involved
- Stamp duty
- Legal fees
- Insurance
- Service charges
- Maintenance and repairs
- Ground rent if the property is leasehold
Benefits and potential opportunities
- Its passive income, so you don’t have to do anything and you’ll still have money coming in
- If you ever lose your job or are made redundant you could use it as a safety net and cover your costs, so you can still meet mandatory and essential expenditures so you can still eg. cover the costs of your personal mortgage and not lose your house if you lost your job
- Property prices could rise so you could sell your property with a capital gain
Risks of a buy to let
- Its essentially a business so there are risks involved, eg. you might not find tenants so you’ll have to cover the costs of the mortgage yourself
- Mortgage costs can increase if eg. interest rises
- Tenants might default or all together not pay
- Tenants could damage the property costing you repair costs
- Property prices may go down
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