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Everything you need to know if you're considering investing in property
Your property may be repossessed if you do
not keep up repayments on your mortgage
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Buy to Let Mortgages vs. Residential Mortgages
The key difference between a Buy to Let Mortgage and a Residential Mortgage is that Buy to Let Mortgages are based on rental income and lenders typically look for rental income to be at least 125% of the loan. This is called the Interest Coverage Ratio (ICR) and is to make sure that the rental income you receive doesn’t just cover the mortgage payments but also the cost of any maintenance, running and insurance costs of the property, as well as any other fees you may be charged from your letting agent.
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Eligibility requirements
The Mortgage Credit Directive legislation means that lenders now review the affordability of the landlord to make sure they can cover the mortgage and other costs of the property when you’re in between tenants and not receiving any rent (this is called a void).
Future stress testing takes place as part of the review to ensure that you can still afford the mortgage if interests rates go up, and it’s a good ‘sanity check’ of your business plan.
It’s also worth bearing in mind that a Buy to Let Mortgage will typically require a much higher deposit- for example, 25% or more- and that the Buy to Let Mortgage deals with the lowest rates are available for those who want to borrow 50% or less of the property’s value.
Use our Mortgage Calculator to find out how much you could borrow.
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Fees involved
There’s likely to be an arrangement fee for a Buy to Let Mortgage which may be higher than a normal residential mortgage. Check what that will be as well as understanding the costs for other fees that may apply for things like the valuation of the property, conveyancing and any booking fees.
Buy to Let Mortgages can also attract early repayment charges (or ‘tie ins’) which vary from product to product. As with any other type of mortgage it’s best to get it all in writing before you start.
There have been substantial changes recently, both to the Stamp Duty (SDLT) you pay when you buy an investment property and also the way that tax is calculated on rental income. It’s always best to get professional advice from an accountant or financial adviser to ensure you understand what changes may affect you, as this will vary greatly depending on your income and personal circumstances. A good place to get some basic information is on www.gov.uk
Check how much you can borrow
Before you start looking at properties, it’s a good idea to get an idea of how much you might be able to borrow.
Buy to Let Mortgages are different to normal residential mortgages, because the amount you can borrow doesn’t solely depend on how much you earn. A minimum salary criteria may be required, but this is dependant on the lender.
Find out more about the differences in Buy to Let and Residential Mortgages in our 'Buy to Let Basics' section above.
Decide what you're looking for and where
Where do you want to buy? Perhaps you want to by close to your home so you can manage the property yourself or alternatively, somewhere further away where the return will be greater?
Who are your target tenants – students, a family or young professionals? Do you want somewhere that’s ready to let or somewhere less expensive that’s requires renovation work?
Start house hunting
Look at websites like Zoopla to see how much properties are being rented for in the area. Speak to local estate agents and ask what types of properties are currently in demand. Draw up your own checklist and work out what are must-haves and what isn’t essential.
Sign up for email alerts so you’ll know as soon as a property that meets your criteria is listed online. Once you find something that you like, call the agent and arrange a viewing- the key is to get in quick!
Make an offer
When you’ve found the right place, make an offer through the estate agent. Remember, the sale price is what the seller hopes to get and not necessarily what they realistically expect. You may be able to negotiate a lower price.
Don’t forget the estate agent is working for the seller and a reduced price could lower their commission – so make sure they put forward every offer to the seller. Know what you can afford and stick to it.
Offer accepted? Time to finalise your mortgage
Make sure you’ve got a solicitor or conveyancer lined up. They will take care of the legal transfer of the property from one owner to another and do all the necessary land searches to check for past and potential problems.
Your Buy to Let Mortgage will need to be arranged so speak to your lender about what you need to do. You may need to show them that you have a tenancy agreement ready and that you’ll be able to cover the mortgage if the property is left empty for any period of time. They’ll also need to know what the property is worth so will arrange for a Standard Valuation.
Surveys and survey results
While it’s a legal requirement to have a Standard Valuation carried out, you might like to get a more detailed survey in order to avoid any nasty surprises later. You can find out more about the different types of surveys in our jargon buster.
If your valuation or survey highlights problems with the property, get a tradesman or builder to quote how much it will cost to fix it. Use this information to lower your offer and renegotiate on price. Be prepared to walk away if you need to.
Exchange contracts
At this point your solicitor or conveyancer will have carried out all the land searches that are needed. You’ll need to have buildings insurance now too, just in case something happens to the property before you move in. You’ll be asked to sign a contract that legally commits you to buying the property.
Money will be moved, which your solicitor or conveyancer will arrange, and you’ll need to pay your deposit. The signed contract will be exchanged with the seller’s solicitor or conveyancer, and the two sides will agree a date to complete the sale. Your solicitor will also prepare for the transfer of deeds.
Completion
It’s time to pick up the keys from the estate agents to your new investment property. This is when the property becomes legally yours.
All the forms will be signed, Stamp Duty (or LBTT in Scotland) will be paid and the money will have been transferred to the seller’s solicitor.
Get ready to rent
Does the property need to be renovated or is it ready to rent?
Make sure you stay on the right side of the law and know your legal obligations as a landlord and what taxes you’ll need to pay.
If you’re renting out the property furnished, it might be a good idea to take out contents insurance. If you’re redecorating, use plain styles and muted colours that won’t date.
Responsibilities that come with letting a property:
You must be able to give your tenants an up-to-date current gas safety certificate that's been provided by a Gas Safe registered engineer. By law, you'll need to have all gas appliances serviced regularly, usually once a year. You’ll also need to give your tenants a valid EPC, which outlined how energy efficient a building is and gives it a rating. You’ll need to get a Domestic Energy Assessor to create the EPC before you start marketing the property for rent.
For any mortgage you have to have buildings insurance. You may be offered it from your mortgage provider but it can pay to shop around to find the best policy for you. If your property is leasehold and you pay a management or maintenance fee, check to see if you’re already covered. Unlike buildings insurance, you don't have to have landlord insurance but it is another way to help protect your investment.
Are you going to use an agency or do it yourself? For a fee an agency can either just find tenants for you or fully manage the property. Tenant’s deposits need to be held by a third party, under the Tenancy Deposit Protection (TDP) scheme. It’s compulsory, and can help resolve any disputes between you and your tenants.
From a quick lick of paint to a brand new kitchen, make sure you factor in the costs of any home renovation that you’ll need to carry out before the property can be let out. The amount of maintenance required will depend on the age and condition of your property but you could get hit with an unexpected cost, like a broken washing machine or blocked drain, at any time.
You'll have to pay Income Tax on your rental income, minus your day-to-day running expenses. You'll also have to pay Capital Gains Tax on any profits over a certain threshold if you sell the property. Find out more about the tax implications on gov.uk
Your property could be empty between tenants so you’ll need to make sure that you can still pay your mortgage during this time.
We spoke to landlords and tenants to find out their attitudes to all the different parts of renting, from common bugbears to their favourite ways to sort out issues.
(Survey of 1,000 landlords and 1,000 tenants in the UK, conducted November - December 2017)
Impartial advice about Buy to let mortgages
Money Advice Service
Safeguard a deposit
Deposit Protection Scheme
Understand your obligations
Landlord responsibilities
Support for landlords
National Landlord's Association
Research rental prices
Zoopla
Work out what it'll cost
Stamp Duty Calculator
Find a surveyor
Royal Institute of Chartered Surveyors
Read about income tax for landlords
Paying tax
These links are to non-NatWest websites. NatWest is not liable for the accuracy of the information provided on these websites.
If you are thinking of building a property portfolio, taking out an investment could help you raise the capital to do this. You must be happy to leave your investment for longer than 5 years. With NatWest Invest you can invest:
Transfers from existing ISAs allowed. The value of investments can fall as well as rise, and you may not get back the full amount you invest. Eligibility criteria, fees and charges apply.