Private renting has boomed to become the second most common household type after owner occupier, buy to let mortgages have played a big part in this, enabling many people to become private landlords.
Buy to let mortgages are designed for buying homes to rent out to tenants, but if you’re thinking of getting one there are a few things to consider before you commit. At a glance, you should:
Consider your current assets and financial position – look at how much you can pull together to get a deposit, or if remortgaging against your equity could give you a bigger deposit. You will typically need a deposit of more than 20% to get a buy-to-let mortgage.
Buy-to-let mortgages are legally different to residential mortgages. You need a buy-to-let mortgage if you are buying a property to lease out and not live in as your main residence.
If you rent out a property you have bought with a residential mortgage (and don’t inform your lender) you could face anything from fees to foreclosure.
Potential rental income from a property is factored in when determining your eligibility for a buy to let mortgage.
Buying a property to let out is fundamentally different to buying somewhere that you would like to live, you need to approach it like a business.
Think about what is important to your customers (tenants) and what would attract them. Location is key and being in a popular area for renting can make a considerable difference to your income.
But beyond fashionable neighbourhoods, think practically about your tenants’ desires. For example, small properties within walking distance of a public transport link, tend to be let faster than larger more isolated homes.
Before you buy anything, take a look at the going rates of rent in the area for comparable properties and compare that potential income to your mortgage costs.
If you can get more in rent than your mortgage repayments, you have a profitable business, but bear in mind you will be paying income tax on your rental income at the marginal rate.
Broadly, there are two ways to be a landlord:
You rent out the properties yourself to your tenants directly. You will need to manage all repairs, answer all tenant queries and make sure you have set up a safe-deposit scheme.
You own the property and pay the mortgage, but a letting agent does all the day to day legwork for you of managing repairs and tenants and rent.
However, there may be some considerable agency fees involved for finding tenants and expect a regular rent cut of around 10-20% going to the agent.
In either case, there are a number of legal responsibilities and duties towards your tenants that ultimately sit with you as the landlord, so make sure you are aware of these before you become a landlord.
Beyond this, you could think about specialising in a dedicated rental market, by familiarising yourself with the tenants, their expectations and regulatory requirements. You could look at:
While property prices have shown consistent growth in recent years, your property increasing in value is not necessarily guaranteed. However, your rental income is more certain (provided you have regular tenants).
The profit you generate from your rental income being greater than your mortgage outgoings is what you should consider being the main return on your investment.
An important detail to remember with most buy to let mortgages is that they are typically on an interest-only basis.
This means only paying the interest on the balance of your mortgage each month, and not paying back any of the money borrowed, so once your mortgage term finishes you will need to repay the balance of money owed.
You will need to be prepared to sell the property at the end of your mortgage, or have saved up enough in a “repayment vehicle” investment to be able to repay the mortgage debt.