BUY-TO-LET AND PROPERTY INVESTMENT

From the accidental landlord to the professional property investor, we can help.

Portfolio landlords face increased requirements which are not covered here but we are very familiar with them and can make the process much easier. If you are a portfolio landlord don’t bother reading, just contact us today to get advice and guidance.

How does buy-to-let property investment work?

Property investment is appealing to many people – it’s something tangible to invest in. Something that we are all familiar with. It could provide an income and, over time, capital growth when it is eventually sold.

One of the biggest benefits that many have enjoyed without realising it when selling homes in the past, is the impact gearing has on returns. More on this below.

It’s easy to think of buy-to-let as just owning a house or a flat but when you become a landlord you are basically running a small business. You need to think about the income and expenditure of that small business. The income is the rent you receive from tenants but out of that must come all your running costs like agent fees, repairs and maintenance, insurance, professional fees, mortgage payments.

Thinking this way will help you to take a balanced and considered approach to property investment.

The accidental landlord

When you decide to move home you do not necessarily have to sell your existing property. You may be unable to sell it at an acceptable price or you may just like the idea of keeping hold of it. Either way, it can be a great way to start a property portfolio if you know what you are doing and are prepared.

You could be in breach of your mortgage contract if you do contact your existing lender to discuss it before proceeding. Your existing lender may grant you consent to let so that you don’t have to change your mortgage in the short term. If you intend to keep the property beyond that then you’ll need a buy-to-let mortgage instead.

Buy-to-let mortgages are a little different to normal mortgages: they tend to cost a little more; require larger deposits; are based on rental income; are usually interest only; and most are not regulated by the Financial Conduct Authority.

The taxation position for landlords has become less favourable in recent years too so all of your rental income will be liable to Income Tax.

You will also have legal responsibilities as a landlord that you should not take lightly.

Don’t be put off though – with our help and guidance it can still be a good route to buy-to-let for many people.

Some of the advantages of property investment

  • the impact of gearing, explained below, can magnify your returns (positive or negative)
  • an insured physical asset underpinning your investment
  • historically favourable interest rates on borrowing mean the cost of your mortgage will likely be very low
  • UK housing shortage ensures demand for property is high and successive governments have failed to rectify this

Some of the disadvantages and risks of property investment

  • rental voids where you still have a mortgage to pay
  • interest rates could go up, increasing your mortgage payments
  • illiquid – not as easy to sell as other investments
  • a lot of capital concentrated in one big investment increases your risk
  • vulnerable to local issues e.g. new roads built nearby or local industry failing
  • if there is a prolonged downturn you may have to wait years to sell at a good price future governments could ruin the party if they introduce unfavourable legislation

How gearing works

The term gearing simply means borrowing money to invest – in this case to invest in property using a mortgage. It brings with it both risk and reward.

Gearing can magnify your capital growth or losses. Imagine you own a property that has a gearing level of 50% (e.g. the property is valued at £100k and your mortgage is £50k, so the debt level is 50% of the overall equity). If the property was to drop in value 5%, then the gearing means, theoretically, that the loss would be magnified to 10%. If there was a 10% drop in value, that loss would be magnified to 20%. The same is true in reverse; a 5% increase turns into a 10% increase, and 10% into 20%. These examples take no account of rental income, purchase costs, professional fees, maintenance and repairs, rental voids, mortgage payments etc. All of these things would obviously alter the actual returns.

Another feature of gearing is that it makes it easier to diversify. If you could pay cash for only one property but purchase three with gearing then you allow yourself to spread risk across three different investment opportunities.

The level of gearing determines how far you go on this risk and reward scale. Mortgage lenders can be wary of highly geared landlords. You may be offered more expensive mortgages rates if you gear to the maximum, consequently requiring more rental income to cover the mortgage payments and other costs. This also increases the potential impact of rising interest rates and your ability to service the debt. It is generally wise to have a contingency fund for things such as void periods, unexpected maintenance costs, tenants who fail to pay the rent, and other unforeseen events.

Buy-to-let mortgages

There is a lot we can teach you about buy-to-let mortgages, how they work, the tax rules, and much more but here are a few headline differences.

Buy-to-let is generally a greater risk than buying your own home and if you are not already a homeowner you may struggle to get a buy-to-let mortgage.

With buy-to-let mortgages, the maximum borrowing is based primarily on the rental income that the property will be able to achieve from tenants paying rent. Lenders typically need the rental income to be 25–30% higher than your mortgage payment. When the lender conducts a valuation of the property it will include an assessment of the likely achievable rental income and this may vary from your expectations so do your homework in advance to avoid disappointment.

Despite the maximum borrowing being based on rental income, you will generally need to demonstrate your own income too.

Stamp Duty Land Tax (SDLT) for buy to let properties is an extra 3% on top of the current SDLT rate bands for properties above £40,000.

A mortgage is a loan secured against your property. Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
The Financial Conduct Authority does not regulate most forms of buy-to-let mortgage.

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