Guide type: Buy-to-Let
10 June 2016
Photo Credit: White Sands Property Solutions
Despite the new Stamp Duty surcharge, Buy-to-Let investments are still proving to be a popular choice for those who prefer investing in property rather than relying on a savings account or stocks and shares to deliver profit.
With a number of regeneration and transport projects such as Crossrail now underway in and around London, Buy-to-Let investors can enjoy low mortgage rates combined with the prospect that the value of their property may increase, meaning higher rental yields and capital growth.
A Buy-to-Let mortgage is a loan, typically from a bank or building society, to enable investors to buy or re-finance property they would then let out to tenants. This is for those who are unable to buy their property outright, but are able to raise a large deposit.
Compared to residential mortgages, which calculates eligibility according to the borrower’s salary, Buy-to-Let mortgages operate using a rent to interest (RTI) calculation. This is where the buyer must prove they will earn enough rental income to cover the interest on the mortgage, and typically lenders look for rent that will cover around 125% of the repayments per month.
Lenders also expect larger deposits for Buy-to-Let mortgages – typically around 25%. Those who already own their own home or have an existing mortgage will also find it easier, which ties in with having a good credit history as they would have already proven that they can handle repayments.
Bearing in mind borrowers will have to pass the lenders’ RTI calculation, it is crucial buyers research the cost of properties and the monthly rent they can expect to get before they sit down with a lender.
The next step is factoring in maintenance costs such as repairs and breakages, whilst also considering the possibility of void periods, i.e. when the property is vacant and therefore no rent will be coming in. Landlords tend to use rent to top up a savings account each month as a safety net for anything that may need repairing or replacing.
Once borrowers know what they can afford, what they can expect from rent and have catered for all of the necessary expenditures, comparing mortgages is the next step. Online comparison websites are a popular tool and should be used in conjunction with advice with an independent broker so borrowers are armed with the knowledge from their own research as well as information on the latest deals on the market from an experienced agent.
Do not rely on results from just one comparison site as they can differ - shop around, making a note of any recurring mortgages that catch your eye. It also pays to take a look at reviews online from other customers.
Do not be fooled by ‘cheap and cheerful’ mortgages. They may appear attractive but fees can quickly escalate, so when comparing, make sure to add up all of the charges over the length of the deal to evaluate its feasibility. Try the Money Advice Service’s Mortgage Affordability Calculator as a starting point to see how much you can borrow.
Independent brokers are the best to speak to for mortgage advice – instead of your regular bank or building society who will just want to sell you their mortgage, independents will give you a well-rounded view of what deals are available and will advise you which is best according to your specific needs, for example whether to decide on a fixed-rate or tracker mortgage.
There are two different routes investors can take when choosing how they will pay for their mortgage: interest-only or repayment; the former meaning that landlords would only pay the interest of their loan each month, whilst the latter would combine both capital and interest. Those with a substantial property portfolio usually opt for interest-only so they can continue to purchase properties without losing out on a hefty amount of capital each month, and can then pay off the mortgage at the end of the term when they sell. Borrowers who want a smaller property portfolio as a supplementary income or alternative pension plan would be better suited to a repayment route so they won’t have to worry about repaying the full loan at the end of the term, or having to sell in order to do so.
Bear in mind recent and expected changes affecting Buy-to-Let investors, including the 3% Stamp Duty surcharge and tax relief deductions. Have a read of our guide on how to survive the tax hike for more Buy-to-Let advice on the changes and how you can adapt to the changing Buy-to-Let property climate.