Buy-to-Let Mortgages

Buy to let mortgages are designed for people who want to buy a house to rent out to someone else (a ‘private landlord’).

Having a second property to generate income can reap substantial rewards over time, but there is no guarantee that the rent payments will cover your costs.

Being a private landlord should not be seen as an easy way of making money, it can be time consuming to keep the property up to date with legislation, and with repairs, and there may be times when your property is empty. There is no guarantee that house prices will rise (and therefore you may sell it for less than the purchase price).

There are 3 main differences between buy-to-let mortgages and residential mortgages:

• Rent Potential – the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not even considered.
• Interest Rate – buy-to-let mortgages have slightly higher interest rates.
• Larger Deposit – typically a minimum of 20% or 25% of the property’s value is required as a deposit.

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 by selling it for a higher price than you bought it? The decision may affect the type of property you purchase, and its 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 135% of the rental property’s interest only mortgage repayments in order to cover your costs should anything go wrong.

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.

We would always advise that you seek appropriate tax advice from a qualified tax advisor or accountant.

Andrews Estate Agents Limited trading as McRobie Adams undertakes credit broking and is not a lender.