Buy-to-let is a special kind of lending which should not seen as an easy way of making money. It is more complicated, riskier and time consuming as compared to most forms of investments. However, having a second property to rent can give better financial rewards over a period of time.
The interest rates and upfront deposits on buy-to-let mortgages are higher as compared to normal mortgages. The mortgage will be offered based on the rent you will earn from the property and your income. In some cases your income is not even considered.
There are 3 main differences in buy to let mortgages:
- Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not ever considered.
- Interest Rate - buy to let mortgages have slightly higher interest rates.
- Larger Deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit.
It is important to evaluate the reason for buying a new property; to earn money month on month or to make profit due to the increased equity prices, as this decision will affect the type of property you wish to purchase. You also need to consider the additional costs apart from the monthly mortgage repayments.
As a thumb rule, your rent should be more than 135% of the mortgage repayments as the additional funds are required to cover the additional cost should anything go wrong. For eg,
These additional costs include:
- Property upkeep - maintenance costs for the property.
- Letting agent's fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
- Ground rent / service charges - applicable to leasehold properties.
- Legal insurance - to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
- Insurance - building insurance and contents insurance for the items provided as part of the rental agreement.
- Furnishings - the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
- Gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
- Decorating costs - the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants
Professional advice can be invaluable for buy-to-let investors, especially for those who are becoming property investors for the first time.
Our mortgage brokers can guide you through every step and direct you to the best mortgage deals for your circumstances.
And remember, because an Independent Financial Adviser can search the entire Insurance market, you can be certain you are getting the most suitable deal available as per your situation.