With recent changes in regulations and unstable house prices, is property still a good investment?
If you’re looking for a long-term investment, buy-to-let property can still provide rewarding returns.
We explore the benefits and drawbacks of buy-to-let investments to help you decide whether expanding your portfolio or becoming a first-time landlord is still worth the risk.
Buy-To-Let Investment: The Risks
We would be lying if we said investing in property was completely risk-free. It’s important to understand the risks involved before making any big investments.
Here’s a look at some of the potential risks currently facing the buy-to-let sector;
Unstable Property Prices
With Brexit on the horizon, no one can be entirely certain what the after-effects will do to the UK property market. If house prices fall, you may lose out on money if you decide to sell.
However, this works both ways. If the property market experiences an uplift post-Brexit, as it often does after slow periods, your investment worth could grow by a significant amount.
Stamp Duty Changes
The changes to stamp duty made in 2016 mean that landlords now have to pay up to 3% more on buy-to-let properties. This can greatly increase your initial outgoings so needs to be factored into the decision-making process.
However, this doesn’t apply to first-time, buy-to-let buyers who can pay the standard home mover rates instead.
Reduction to Tax Relief
A new tax system is being phased in, and by 2020, buy-to-let landlords will no longer be able to deduct any mortgage interest payment from their rental income before paying tax.
These changes mean most landlords will be paying higher tax on their rental properties and may even find they move up a tax bracket.
Unfortunately, void periods can happen, and are sometimes out of your control. Extended void periods can negatively affect your annual returns and are best avoided.
To prevent void periods, there are some simple steps you can take;
- Invest in quality marketing
- Keep up with maintenance
- Think about your target tenant
- Ensure compliance with current health and safety obligations
Investing in Residential Property: The Rewards
When you get it right, buying residential property to rent can still be a profitable investment. Here, we explore some of the benefits;
HMO Properties: Higher Rental Yields
Investing in an HMO property is a good way to see larger returns on your investment.
An HMO property is shared by multiple people or ‘households’, and according to Property Investment UK, can provide rental yields up to three times higher than single lets.
With the demand for shared housing continuing to grow in cities and student towns, investing in property with the idea of renting it as an HMO remains a solid investment.
Location: Maximising Returns
When looking for a stable investment property, location remains key.
While larger cities in the North such as Manchester and Liverpool are currently experiencing an uplift in local housing markets, some areas of London are slowing down.
Finding the right rental market in an up-and-coming area will improve your chances of enjoying a higher rental yield.
For example, properties in larger University towns make a great investment for student landlords as there is a steady supply of students looking for housing.
To get a better idea of where to invest now, the following areas have been tipped as providing a solid investment;
Look for areas with a younger population who haven’t yet stepped a foot onto the property ladder and areas with good transport links into popular areas.
Long Term Rewards
As long as you’re willing to exercise patience, investing in buy-to-let property still brings with it worthwhile, long-term rewards.
The security of a steady income flow and the possibility of inflation provides a solid return on investment and a safety net for retirement.
The Brexit Effect: Should I Be Worried?
Due to Brexit uncertainty, many people have delayed selling or buying a home. But that shouldn’t necessarily put you off investing in buy-to-let property.
The UK population is growing, and people still need homes to live in. In fact, as first-time buyers are thinking twice, the demand for renting may even rise in the short term.
Although it’s hard to predict, unstable house prices and rising mortgage rates could result in a higher number of people looking to rent, allowing private landlords to enjoy a stable rental market.
Either way, the residential property market continually experiences ups and downs, meaning that quiet periods don’t usually stay quiet for long.
Look After Your Investment with No Letting Go
If you’re thinking of investing in buy-to-let, it’s vital to have all of your documents and property checks in order.
Here at No Letting Go, we help landlords, letting agents and property professionals alike manage their portfolio by providing reliable inventory reports and other essential services.
From check-in services to property appraisals, discover our wide range of professional property inventory services to see how we could help protect your investment.
High tenant demand means buy to lets can offer a lucrative investment for prospective and professional landlords. However, changing terms to tax relief on buy to let mortgages and rising interest rates require landlords to think carefully about the risks and rewards of entering into one.
If you’re considering a buy to let (BTL) mortgage, it’s important you understand the differences between a BTL mortgage and a residential mortgage and the different types available to you.
Having all the information available is one way to make a secure decision. That’s why we’ve created this guide on buy to let mortgages so you can make the right choice for you.
What is a Buy to Let Mortgage?
Put simply, a buy to let mortgage is a loan specifically designed for landlords looking to buy property to rent.
Buy to let mortgages are viewed as higher risk by lenders, meaning there can be higher fees, deposits and interest rates than residential mortgages.
But don’t let that put you off completely!
Can Anyone Get a Buy to Let Mortgage?
If you’re looking to buy property in order to rent it to other parties, it’s likely you’ll need to make a BTL mortgage application.
There are certain criteria you need to meet in order to be considered.
You are eligible for a BTL mortgage if:
- You are looking to invest in residential property (this includes houses and flats)
- You have the financial stability to repay the mortgage
- You own your own home (either with a previous mortgage or outright)
- You have a good credit rating
- You earn over £25,000 per annum
- You are below a certain age. (Most lenders have stipulations regarding the age you are when your mortgage ends which is usually between 70-75 maximum)
How do Buy to Let Mortgages Work?
BTL mortgages aren’t too different from regular mortgages, which, as a homeowner, you’ll be very familiar with.
There are, however, some variations it’s important to be aware of:
- Fees and interest rates are a lot higher than residential mortgages
- The deposit is around 25% of the property’s value as a minimum
- BTL mortgages tend to be interest only, rather than requiring monthly repayments. This means that the loan is to be paid in full at the end of the mortgage term.
- Most buy to let mortgages are not regulated by the Financial Conduct Authority (FCA). However, if you are letting the property to a family member, this will be considered as a consumer buy to let mortgage and will be subject to the same regulations as a regular residential mortgage.
Types of Buy to Let Mortgages
Buy to let mortgage deals can differ depending on which lender you go with.
Interest rates will all depend on the amount of money you borrow and how much rental income you receive.
It will also be affected by the type of buy to let mortgage you choose:
Tracker BTL Mortgage
If you opt for a tracker mortgage, your monthly repayments are subject to change each month depending on interest rates. This is great news if rates decrease, but not so good if they increase dramatically.
Discounted Variable Mortgage
A discounted variable mortgage is a mortgage deal with an interest rate set around 2% below the SVR (standard variable rate). These deals usually last around two years. The rate is still subject to change dependant on the SVR, but the discount will stay in place for the agreed time.
Multiple Year Fixed Rate Mortgage
A fixed-rate mortgage will keep your repayments low and stable for two to five years. Different mortgage providers offer different deals, so it’s worth shopping around. Just make sure to check what the rate will increase to at the end of the fixed period.
How to Get a Buy to Let Mortgage
Now you know the basics, it’s time to find out how to apply for a BTL mortgage and where to look.
Most large banks loan BTL mortgages, and a mortgage broker can help you decide which mortgage deal makes the most sense for your needs and purposes.
Another place to look when searching for the best mortgage rates is a reputable price comparison website.
Here are some reliable sites to use:
It’s worth checking a few comparison sites to get the bigger picture before making a decision. And don’t forget to read the small print for hidden fees and extra charges!
How Much Can I Borrow?
Your borrowing limit is connected to your rental income. This is called a loan-to-value, or LTV amount, which is worked out as a percentage of the property value. An LTV for BTL mortgages is usually around 90%- 95% rather than 100% for residential mortgages.
This means that your loan is likely to be lower, due to the perceived high risk factor.
Because of this, it’s recommended that you charge around 25%- 30% more for rent than your mortgage payment.
Local property agents or websites can help you get an idea of the amount of rent you can charge in your desired area.
Despite lower borrowing amounts and a larger deposit, the average buy to let purchase price is actually lower than for a residential property.
Tax on Buy to Let Mortgages
Keep in mind that there will be other outgoings to consider when deciding if you can afford a BTL mortgage.
Income tax, capital gains tax, landlord fees, landlord insurance, and letting agent fees all need to be considered.
With changing terms to tax relief on buy to let mortgages it’s important to keep track.
The new regulations mean that landlords can no longer claim all their mortgage interest against income tax on rent. The amount of interest deductible is being reduced by 25% a year until 2020, when it will become a 20% tax credit on the mortgage interest paid.
This change has the potential to raise some landlords up a tax bracket.
Plan for all Circumstances
As you know, applying for a mortgage is a not a decision to be taken lightly as the responsibilities are a long-term commitment.
To protect your financial security, it’s a good idea to have a plan in place for different eventualities.
For example, it’s not uncommon for a rental property to experience void periods in which no rent is coming in. Or, at some point or another, a pipe might burst, or a roof might need urgent repair. As a responsible landlord, you need to be able to provide effective and timely repairs.
To protect yourself from this burden, making a savings plan is vital. Ensure you are saving as much as possible when you have full paying tenants to avoid any stressful situations in the future. This should happen before making an offer on a house.
Tip: Don’t rely on selling the property to pay the mortgage off! If house prices fall, and you don’t have a backup plan, you’re in serious trouble.
Protect Your Buy to Let Investment
While applying for a mortgage is always a risk, once you have all the information at your fingertips, you can make a better informed decision.
One way to help guarantee the safety of your property investment is to ensure you are fulfilling all your duties and requirements as a landlord.
No Letting Go offer a wide range of property management services including professional unbiased inventories, safety assessments and maintenance reports to help you protect your investment.
Browse our full list of services to find out how we can help.