Table of Contents
- Mortgage Affordability Calculator
- Buy-To-Let Mortgage Rates
- How To Calculate Yield
- How To Find The Best Location
- Finding The Perfect Tenant
- How to calculate all the costs
- Pro’s and Con’s of Agents
Buy To Let – is it worth it?
Buy-to-let can be a lucrative market to move into especially when more risky options for investment are looking…well…even more risky!
During the property boom of 1995 to 2007 Britain’s greatest property investors made a lot of money, over £3,000 billion to precise.
Whether established or a newcomer to buy-to-let then this article is for you. We are going to show you the most important advice for for any would-be buy-to-let investor or seasoned professional looking to increase their property portfolio.
But first, why do you want go in to buy-to-let in the first place? If you are already in the market, you’ll know that, with a bit of homework, you’ll enjoy income, tax benefits and what will hopefully be a steadily appreciating asset.
With each property added to your portfolio the learning curve gets flatter and flatter while the income stream grows.
Step 1 – Use a mortgage affordability calculator
Before you get stuck in you need to review your finances to make sure you know how much you can afford to borrow and what value of property you will be looking to purchase.
Banks have tightened their lending criteria significantly since the 2008 credit crunch and although you might be able to make the monthly mortgage payments on paper, you need to confirm if the bank will actually lend you the mortgage in the first place.
Whether you’re looking for a 5 bedroom townhouse or a studio flat, you need to calculate what you can afford before getting your sights set on a new rental pad.
Check out Money Advice Service’s mortgage affordability calculator to find out what you can afford to borrow.
Step 2 – Find the latest Buy-To-Let mortgage rates
Once you have a feel for what you can borrow it’s time to search for the best deal for your buy-to-let mortgage. In doing so you should also compare all the different providers and weigh up all the different types of mortgages and their respective charges (we’ve included some of the cheapest buy-to-let mortgages on the market today, in our table below).
Loan To Value
You probably already know that LTV or loan-to-value is all about how much you have to borrow (in the form of a mortgage) in relation to how much a property is worth. It’s usually a percentage figure that reflects the percentage of the property that is mortgaged compared to the amount that is put in by the buyer (your equity).
Since April 2016 new tax legislation means potentially higher personal tax bills from your buy-to-let portfolio. This is particularly relevant for high-rate tax payers. One solution is to purchase your buy-to-let property using a limited company.
Contact us for more information on limited company buy-to-let mortgages and company formation.
Depending on what lump sum you have available for your deposit will affect what LTV mortgage you can get. The higher the LTV, the higher the interest rate as it’s more risk for the banks.
|Provider||Initial Monthly Cost||Initial Rate||Type of Mortgage||Max LTV||Product Fees||Overall Cost for Comparison|
|Leeds Building Society||£407.02||1.65% then 5.99%||Fixed for 2 years||60%||Yes||5.3% APRC representative|
|Virgin Money||£412.75||1.77% then 4.99%||Tracker for 2 years||60%||Yes||4.6% APRC representative|
|Santander||£418.52||1.89% then 4.74%||Fixed for 2 years||60%||Yes||4.5% APRC representative|
|Platform||£418.52||1.89% then 5%||Tracker for 2 years||60%||Yes||4.8% APRC representative|
|The Mortgage Works||£592.71||1.99%||Tracker 2 years||70%||Yes||4.8% APRC representative|
|Platform||£612.67||2.28%||Tracker 2 years||70%||Yes||4.8% APRC representative|
|Legal & General||£749.62||2.89%||Discounted Variable||80%||No||4.9% APRC representative|
|Mortgage Trust||£772.61||3.15%||Fixed for 2 years||80%||Yes||5.1% APRC representative|
Source: GoCompare 10 July 2016
Consider a broker to find even better deals
Your mortgage is one of the biggest financial commitments you can make and brokers have to recommend the most suitable mortgage for you – they are also a convenient option that can save you time and money.
Advantages of using a broker
- Have a wealth of experience in the mortgage market
- Have access to a huge range of mortgage products and some exclusive deals otherwise not available
- Will help you understand all of the costs involved and check your finances for you
- Will often complete the paperwork so your application should be dealt with faster
Whole of market
Ultimately it’s tailoring it to your needs that’s important, so make sure whoever you look at, ask if they are specialists in buy-to-let lending and confirm they look at all the lending providers which meet your criteria.
Some brokers will have alliances with lenders and others will be independent. Remember to ask if a broker is ‘whole of market’
Brokers do have lending criteria so you’ll have to ensure you meet those. As a guide this simple summary explains our key criteria and what we can offer as part of our own service:
- No minimum income
- Maximum age 85
- Rental yield 125% @ 5%
- Limited company mortgages available
- HMO’s / Student lets / Blocks of flats
- Semi-commercial catered for
- Max LTV 85%
Step 3 – How to calculate yield
Next you need to work out how much income or yield you could make from your new rental property.
For example, if you’ve looked at a property that’s worth £200k and you find a typical rent for an equivalent property at £12k per annum or £1,000 per month, then your yield would be 6%.
The table below is a simple guide to show you different yields – a handy measure of income from investment.
|Property Value/Monthly Rent||£500||£750||£1,000||£1,250|
Table shows the rental return on your investment as a percentage of its value
What rent should I charge?
Some common questions you may consider are “should I charge rent for the whole property” or “should I just charge for each person?”. Best place to start is in the property rental listings online and in property pages. Get a feel for the rent similar properties are being let for and that will give you a guide as to what you should be charging for an equivalent property.
You could also consider making a map of the area you are considering investing in and annotate it with postcode and rent charges to give you a visual representation of what rent is charged for each area.
Think of travel connections for these areas too, if you’re looking in London specifically, Rightmove Tube Map is a handy little app that helps you find property conveniently close to tube stations.
Also take a look at the most affordable places to rent in your area, if you’re looking at providing a more affordable rental option.
Step 4 – How to find the best location
May be you live near a university town where thousands of students are in the market year in, year out. If you are that’s great! Yes, students do have their benefits.
If that’s the case you’ll know the majority of students need digs from their second year onwards, but more than that, these cities’ economies support numerous business sectors whose workers also need accommodation in accessible locations.
Ultimately, if you can pick up a small property in a good location, with scope to accommodate students and workers alike, you can enjoy a tangible investment and provide a much needed service.
With a bit of research you can find out the best locations for returning healthy yield.
Step 5 – How to find the perfect tenant
So you’ve checked your finances, found a good mortgage deal, found a good location and worked out what rent you can charge…now it’s time to see who could be renting your new pad. Will it be university students? families? professional singles or couples? Finding the right tenant is absolutely crucial for peace of mind and security as well as reducing risk and associated problems down the line. Here’s 5 Tips to Picking The Right Tenant.
Location is really important as you not only need it to be in the right place for the people you want to rent to, if it’s miles away, how are you going to manage the property and its up-keep? Maybe that’s not so much of an issue if you appoint an agent to manage, but it’s all worth considering.
Step 6 – How to calculate the costs
If you’ve been around the block with buy-to-let, you’ll already have a good idea of all the fees associated. For budgeting purposes we’ve put together some of the most common costs.
|Stamp Duty||Buy-to-let stamp duty has just increased and there has been some confusion over when it applies and when it doesn’t. To find out exactly what the score is head over to the Telegraph’s article or calculate your fees by using the government’s stamp duty calculator. It’s 3% increase on top of current rates, for purchases of additional residential properties above £40,000, such as second homes and buy-to-let properties.|
|Valuation Fee||The cost can be £150-£600 based on the property’s value.|
|Surveyor’s Fee||Surveys range from £250 to £600 or more.|
|Legal Fees||Solicitor or conveyancer will need to carry out all the legal work when buying and selling your home. They also do local searches costing around £250-£300. Legal fees are typically £500-£1,000 including VAT at 20%.|
|Electronic Transfer Fees||Typically £40-£50|
|Estate Agent Fees||1% to 3% of the sale price plus 20% VAT.|
|Removal Costs||Usually £300-£600|
|Fees||A booking fee can range from £99-£250. Arrangement fees can be up to 1% and a mortgage valuation fee can be typically £150 or more.|
|Maintenance||On average you can expect to pay around £5,750. Be aware your survey should have highlighted any problems already which should have been factored into your budget.|
|Insurance||The lender will require that you have buildings insurance to cover you from fire, floods and subsidence. Contents insurance is also very important but is down to your tenants. Life insurance will pay off the mortgage should you die before you’ve repaid the entire amount.|
|Council Tax||Your local authority sets your council tax based on where you live and the valuation band your property is in. The government website has more information on council tax charges|
|Running Costs||A top tip is to ask the the property sellers how much they spend on utilities every year. Also don’t forget your tenants will have charges for a landline, TV packages and broadband.|
|Agent||If you appoint an Agent to handle your rental property remember you’ll have monthly costs to factor in, typically 7% to 15% depending on the level of service you choose|
|Tax||Remember tax on property and rental income is the law so you must factor this into your calculations.|
With thanks to Money Advice Service
Step 7 – The Pro’s and Con’s of using an Agent
Renting your property can be stressful, but a good Agent can help take the stresses out of the multitude of tasks you need to be on top of when renting a property. In the table below we’ve shortlisted the pros and cons of using a letting agent.
- Legal – they know the business and can take care of any legal requirements
- Prep – can help with preparing the property for the rental market
- Maintenance – have established relationships with plumbers, electricians and heating engineers
- Advertising – Have access to Marketing & Advertising channels
- Vetting – experience with tenants and the vetting process
- Convenience – you can leave it all to them
- Cost – which comes off your bottom line and affects your income
- Less Control – it will never be quite like keeping an eye on things yourself
- Communications – by using a middleman can cause confusion between tenants’ demands and what your agent tell you
Is now a good time to start?
That’s a very good question as there has been a stamp duty rise for second properties as of April this year (2016), but you’ll be glad to hear, the market is still buoyant.
With house prices rising, first time buyers are not always going to be able to enter the market, but landlords are likely to borrow more to do just that.
There is also a trend towards renting for the young that goes beyond affordability – something that represents a cultural shift as it allows mobility and the chance to seize opportunity without being bound geographically.
What does the future look like for buy-to-let?
Next year, tax relief will be reduced for landlords, if you’re a higher rate taxpayer you should look for advice and guidance on how best to combat these changes, which we can offer.
Also a Bank of England research paper in May 2016 suggests these tax changes won’t dampen demand for BTL property as investors believe rental growth will continue in the years ahead. Another good sign.
With full Brexit fallout still to be seen, you’d expect uncertainty in major markets for a number of months, which bodes well for landlords as again, tenants are unlikely to choose to move from a house where they share rent with several co-tenants to a purchased property with just a partner.
True, the big four banks have changed their BTL criteria for lending, requiring rent charged per annum to be 145% instead of the previous 135% of mortgage costs, but other lenders haven’t followed suit. Yet.
The potential for the rental market is enormous as it is relevant to new householders, established householders and students who, at some point or another will need the flexibility and affordability of a monthly rent — until the time is right or they too can afford to invest their own capital in a property purchase. So, if you’ve going to move in to buy-to-let or increase you’re portfolio, remember we’re here to help.
Want further advice or ready to find a buy-to-let mortgage?
For a free consultation call Kevin Spear on 0117 422 3456 or email email@example.com
Kevin Spear is a licensed mortgage broker based in Bristol offering specialist face to face mortgage advice for residential and commercial properties in the South West.