Financial Insights

Buy to Let Considerations

Here are a number of things you should consider before embarking on a buy-to-let investment strategy.

1. Think about what you want to achieve

For example:

Are you looking to produce an income today?

If you want an income now then you might go for an interest-only mortgage in order to maximise the difference between the monthly payments and the rental income. You might also consider buying higher yielding property such as ex-local authority houses and flats.

Or … do you want to produce an income in the future?

If you wish to produce an income from an investment property at a future time — perhaps to fund your retirement — you will probably go for a capital and interest repayment mortgage. This way, you could feed the rental income into the loan with a view to reducing the capital balance as quickly as possible, and therefore clear the debt. The result is an ‘unencumbered’ asset to do with as you wish.

2. Lending Criteria

Currently, most lenders require a deposit of around 25% on buy-to-let mortgages and some impose a monetary cap.

Lenders also differ greatly in their overall selection criteria. One lender, for example, will focus predominantly on the property itself, whereas another will make an assessment of not only the potential rental income of the property but also the borrower’s ‘primary’ status.

For example, it may want to see that the investor earns a certain income per annum from his/her primary occupation and also that the rental income from the investment property will cover the mortgage payments by 130%.

Don’t be downhearted by this! There is huge variation between lenders. Just contact us and we will see what can be done.

3. Can you let it?

Lenders need to be sure that a property is a good rental proposition before they make a mortgage offer. So you need to do your homework to ensure that your chosen property is in an area where there is a strong rental demand, and in particular for the kind of property you wish to buy!

But who determines what the likely rental income will be? Lenders generally turn to their own ‘panel valuer’ to report on the likely rental income as well as the standard valuation of the property. Be warned! … these tend to be more conservative in their estimations than the agents you are purchasing from.

4. Maximise your return

Yields on buy-to-let properties can vary enormously. Landlords who purchased when house prices were rock bottom may now be enjoying yields, after expenses, of 9%–10% on their original outlay. But yields will necessarily be lower for those who bought when property prices were relatively high.

However, investors should bear in mind that the return isn’t simply the income you earn but also the capital gain you make when you come to sell. It is the total sum.

Generally, higher yielding properties, such as ex-local authority flats, offer less scope for capital growth, whereas lower yielding properties — period apartments, for example — tend to provide far greater capital appreciation.

To maximise your return, be sure to seek proper advice as to the costs you can set against tax on the rental income. These can include: mortgage interest, insurance premiums, cleaning and gardening fees, letting agent’s commission and, if the property is let furnished, a 10% wear and tear allowance.

However, the cost of initially furnishing the property and any measure to improve, rather than maintain, the property cannot be included. It’s important to file all paperwork relating to the cost of upkeep, because the Inland Revenue may ask for this to check against the information you provide in your self-assessment tax return.

If you need a good accountant then we can recommend one for you.

5. Gearing

You may be able to purchase your rental property outright. If so, you might consider a mixture of using your own money in concert with mortgaging to invest in more than one property. Then you would be investing money you have borrowed – which is ‘gearing’.

Borrowing the capital to fund the property purchase will help to enhance your yield. For example, if you buy a £100,000 property and receive rental income, after costs, of £6,000 a year, then your yield is 6%.

But take out a 75% mortgage, requiring you to commit just £25,000 initially and your yield on capital rises to 24%, less the additional cost of mortgage interest. For £100,000 you could theoretically do this four times!

But be careful … In periods of low interest, the returns are very attractive, but always remember that if interest rates rise and your mortgage costs increase, your yield will fall.

This risk can be managed to some extent by fixing the mortgage interest rate, but be wary of being too enthusiastic. During the crash of 2008 many landlords found themselves in negative equity and unable to sell without loss.