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By Louisa Fletcher | 23 June 2016
With the demand for private rental properties soaring, more and more people are investing in property. But what are the main things to think about if you’re considering becoming a first time landlord?
How Buy to let Mortgages Work
First things first, a Buy to let mortgage is a little bit different to a residential mortgage. The main difference being that Buy to let mortgages are based on rental income, and that lenders are typically looking 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 the cost of any maintenance, running and insurance costs of the property, as well as other fees you may be charged, for example by your letting agent. The ICR will vary from lender to lender, so do check when you’re looking at products what this figure is, particularly in relation to the rent you’re expecting to receive.
Do your numbers stack up?
Having said that, due to recent legislation called the Mortgage Credit Directive, lenders now also review the affordability of the landlord as well, to make sure you 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). Part of this process is also future stress testing 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. Take a look at our mortgage calculator to see how much you could borrow.
Don’t forget the fees
As with other mortgages, you need to think about the 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. So, as with any other type of mortgage it’s best to get it all in writing before you start.
Getting expert advice
There have been substantial changes recently, both to the Stamp Duty (SDLT) you now 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. But a good place to get some basic information is on www.gov.uk
As you can see, Buy to let can be quite complex, particularly if it’s your first investment property, so ideally you need to get expert advice based on your circumstances. In which case, it’s probably worth talking to an intermediary, broker or adviser, who’ll be able to help you work through your options and select the right product based on your investment plans and your individual circumstances.
Louisa Fletcher, a property expert from the Mortgage Advice Bureau
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