Is Buy to Let a Good Investment?
The Buy to Let market represents an interesting area of investment currently. With mortgage rate rising and legislation tightening, you may be wondering if Buy to Let is a good investment. In some cases, Buy to Let is a good investment but if you get the process wrong it can be costly.
The good news is there are many actions you can take to reduce the risks associated with Buy to Let and for many, Buy to Let offers a good investment opportunity. This article explains Buy to Let mortgages and some of the common pitfalls to avoid.
Let’s explore Buy to Let investments further.
What is Buy to Let?
A Buy to Let is a mortgage product that allows you to purchase property with the express purpose of letting the property out. Residential mortgages normally stipulate that you must be a resident at the property whereas Buy to Let mortgages do not.
For lenders, Buy to Let mortgages represent a higher risk because the borrower is not present at the property and a landlord is at the mercy of tenants to look after the home.
As a result, Buy to Let mortgages typically have a higher interest rate and different eligibility criteria including a higher deposit amount.
How Much Can I Borrow on a Buy to Let Mortgage?
Buy to Let mortgage calculations are different to residential mortgage affordability calculations. With a Buy to Let mortgage a lender will conduct a stress test.
This stress test takes into account the monthly mortgage payment and the expected rental income from your chosen property. The rental income must be much higher than your mortgage payment.
For this reason, most Buy to Let landlords choose to take interest only mortgages as this reduces the monthly mortgage payment to the interest on the loan and improves the chances of passing the stress test.
The majority of Buy to Let mortgages are interest only but you can obtain a capital repayment Buy to Let mortgage providing the rental income is high enough to pass the stress test.
At the end of the interest only mortgage you will need to repay the capital on the loan. This operates in a similar way to a balloon payment on car finance. Most landlords opt to sell the property at the end of the mortgage to repay the loan.
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How Much Deposit Will I Need for a Buy to Let?
You will need a higher deposit amount for a Buy to Let mortgage because of the additional risk lenders face when offering these products. Buy to Let mortgages are available with deposits of at least 20% of the property value although many lenders ask for a higher deposit.
For example, if the property you are looking to buy is valued at £200,000, you will need to put down at least £40,000 as a deposit to obtain a Buy to Let mortgage.
Other Costs Associated with Buy to Let
Aside from the higher deposit amount mentioned above, there are numerous other costs associated with Buy to Let mortgages.
Common Buy to Let additional costs are:
- Mortgage application fees
- Conveyancing and broker fees (if you are using a broker who charges a fee)
- Renovation and maintenance costs
- Stamp Duty
Stamp Duty and Buy to Lets
In most cases a Buy to Let will be a second home and therefore qualifies for the second property Stamp Duty charge.
This means you will be charged an additional 3% of the property value above the standard Stamp Duty liability.
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Legal Responsibilities as a Landlord
Alongside costs, you will also have additional responsibilities when taking on a Buy to Let. Legislation around landlords is ever-changing and you should ensure you stay up to date with any relevant legislation changes.
As a landlord you must:
- Provide accommodation that meets a minimum threshold of habitability
- Ensure all health and safety legislation is adhered to
- Ensure electrical appliances are energy efficient and independently tested
Other legislation can also play a big part in your role as a landlord. For example, landlords must abide by legislation around tenant’s rights and follow strict eviction processes in the event of non-payment of rent.
Some jurisdictions have also enacted rent freezes which prohibit the amount you can increase rent or how often you are entitled to review rent.
In some cases, landlords wish to avoid this responsibility by hiring a third-party property management company to oversee legislative compliance. You should be aware hiring a property management company carries additional fees.
A common misconception is you can shirk responsibility for your property by employing a property management company. In almost all legal disputes the landlord carries the ultimate responsibility for property they own.
Advantages of Buy to Let
Purchasing a Buy to Let property in a high rental yield area can be extremely lucrative. For example, it is not unheard of to achieve a Return on Investment of over 10% per annum in high rental areas.
Another advantage of Buy to Lets is the equity you hold from the higher deposit. When the property is sold you should be able to recover your initial investment. The caveat to this is if you purchase a property during a property boom, you might not realise profit if you sell during a property market depression or crash.
Overall, if you follow Buy to Let best practices, you should find the return on investment from Buy to Let is competitive compared to other types of investment.
Risks of Buy to Let
The main risks of Buy to Let revolve around tenants. If a tenant chooses not to pay rent, then you are still obliged to pay your mortgage each month.
It typically takes at least 2 months to follow the correct eviction process and you may find you are paying a mortgage without generating any income for several months when you have a problem tenant.
In rare cases, the eviction process can be lengthy, normally because of a dispute from your tenant. If the tenant is withholding rent during this time, you may find you make a significant loss on your investment.
How Do I Get a Buy to Let Mortgage?
A large part of Buy to Let profitability is obtaining the best possible Buy to Let mortgage deal. Using a Whole of Market broker will allow you to compare mortgage products across a range of lenders and find the best deal.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee free, impartial Buy to Let mortgage advice.
Contact Boon Brokers to book your Buy to Let mortgage consultation today.