Buy To Let
Although buying to let has had something of a bad press in recent years
The market is now turning and buy to let is seen as a great way of investing in bricks and mortar. But buying to let is actually quite different from buying a personal home. You need to research the whole market properly and ensure that you do your sums. It does cost money to establish yourself as a landlord, so make sure that you have researched the area properly. If you can, try to speak to local letting agents to ascertain how much you can expect in terms of income and what the demand is likely to be.
As a general rule, the majority of lenders will expect that the income from rents will total a minimum of 130% of your mortgage repayments. In effect that means that you can borrow up to 77% of the expected value of the property.
Lenders will offer mortgages that amount to 75% of the value of the property for a buy to let house, although in some instances you can get up to 85% on the basis of Loan To Value, often referred to as LTV. However, there are a variety of buy to let mortgages on the market but be warned, the rates are higher for buy to let mortgages simply because they are seen as more risky.
You do still get to choose between discounted, fixed or even variable rate mortgages or loans, but you need to bear in mind that if your mortgage rates increase substantially you may not be able to pass on these costs to your tenants. This is important if you opt for a discounted mortgage; will you be able to make the payments after the discount period is finished. If you opt for standard variable rate, the same applies.
Submitting an application for a buy to let mortgage is basically the same as for a personal mortgage but usually you will be asked to provide some kind of documentation from a local letting agent that will provide details of the amount of rental income that the property would be able to fetch. Since the recession bit, some lenders are also now asking for proof of your income and if they feel that you do not earn enough, then the loan may be refused.
A lender can also stipulate that you will only be granted a loan or mortgage if you use an agent to let the property and manage the tenants. This can cost up to a total of !5% of the income from the property (assessed as the gross rental income) and you need to factor this in to any calculations.
Tax and Insurance
It is important to remember about tax and insurance. All rental income is taxable, so it will be used to calculate the amount of income tax that you need to pay. However, you can claim some expenses such as the mortgage interest costs, any fees paid to letting agencies and if the property is let as furnished accommodation you will also be eligible to claim 10% wear and tear on the furnishings. You will also have to pay capital gains tax if you sell the property; usually up to 40% of the total proceeds.
Insurance is also required in the form of buildings insurance to the building itself and the policy needs to stipulate that it covers buy to let properties. This is important legally. If you are providing furnished accommodation then you should also have some contents insurance. Finally consider taking out legal expenses insurance, simply because it can be costly if you have to pursue a tenant through the courts or non payment of rent or to evict them.