Buy To Let Mortgages
Buy to let mortgages have more complexity than standard home loans. We’re here to simplify the added considerations.
Property Investment
Balancing Risk and Reward
As a broker of buy to let mortgages we have a responsibility to help our customers understand the risks, costs and responsibilities involved with this type of investment.
As an investment, buy to let property can bring financial rewards if balanced against risk. You will need to purchase and maintain a property, find your tenant and manage rental payments and understand the taxes on annual profits or the sale of a property.
We understand the financial aspects are most likely to drive your decisions, and we can assist you to make informed decisions based on the costs and risks involved.
Some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.
Buy to Let Costs
Purchase Costs
- Deposit: The typical maximum Buy to Let mortgage is 75% Loan-to-Value (LTV). You will need to have at least 25% of the property value available as a deposit.
- Arrangement Fee: The arrangement fee can usually be added to the loan, meaning it will attract interest but it can be offset against the tax liability. The fee can be up to 3.5% of the amount borrowed.
- Other Costs: Includes legal fees, survey fees and stamp duty if it is applicable.
Mortgage Costs
Mortgage interest payments are normally the largest ongoing cost. Mortgage lenders will prefer rental incomes of 125% or more of the interest-only mortgage payments, as they will want to guarantee that the rental income will cover more than the monthly payments.
Rental incomes higher than the value of the monthly payments helps to provide a safeguard for when the property is unoccupied, helping landlords to meet the property running costs.
Property Running Costs
The tenant will normally be responsible for other costs such as TV license fee, utilities and council tax, however in some cases the landlord may choose to manage these.
The tenancy agreement should set the responsibility on behalf of either the tenant or the landlord.
Income and Tax
The main source of Buy to Let income is rent, therefore it is important to get an understanding of likely rental income prior to purchasing a property. This can be achieved by researching the local market using online tools and speaking with local estate agents.
Potential resale values of properties are also important to consider. Therefore the local market, schools and transport links should be investigated.
Tax is calculated on the gross annual rental income less any allowable expenses incurred from renting the property out, such as wear and tear maintenance. Tax is then due on the profits made from letting the property. It is sometimes possible to carry forward any losses to set against profits in future years.
It is important to keep records of rent payments and any expenditure on the rental property for tax returns. Your accountant will then be able to assist you with informing HMRC of your rental income, allowable expenses and any allowances.
For guidance the following are examples of expenses that can be deducted, but it is not a comprehensive list:
- Utility bills
- Building and contents insurance
- Mortgage interest payments
- Property maintenance and repair – but not property improvements
- Letting agent and accountant fees
- Costs of services including cleaners, plumbers, electricians and gardeners
- Other directly-attributable costs such as phone calls and advertising for tenants
- Sale proceeds and tax
We would always recommend that you seek advice from a qualified accountant with regard to the taxation of your buy to let income and are able to introduce you to our preferred partner if you require this service.
When you sell a Buy to Let property the proceeds are subject to Capital Gains Tax.
Letting Agent Services & Charges
Whether you are new to property investment, or you have multiple properties, a letting agent can help to manage the administrative burden whilst being a knowledgeable source of advice.
A reputable letting agent can:
- Source new tenants
- Carry out references and credit checks
- Create property inventories and condition reports
- Draw up tenancy agreements
- Collect the initial deposit and monthly rental payments
- Carry out periodic property inspections
- Manage the property
Letting agents will typically charge between 10-15% of the monthly rental income. Some agents will have an additional set up fee. Charges do vary from agent to agent, so it is worth comparing price and service quality of multiple agents.
Buy to Let
Landlord Obligations
Tenant Deposit
An initial deposit should be taken to cover the landlord against any damage or missing items at the end of the tenancy.
The deposit must be protected in an applicable Tenancy Deposit Protection scheme, which guarantees the tenant will get their deposit back at the end of the tenancy as long as no damage has occurred.
If you do not protect your tenant’s deposit, you may be taken to court and made to repay the deposit plus an additional sum up to three times of the deposit. You may also be unable to seek possession of your property.
There are three Tenancy Deposit Protection schemes approved by the UK Government:
Deposit Protection Service
The Deposit Protection Service offers a custodial scheme which is free to both landlords and letting agents. The tenant’s deposit is held in a bank account and is returned at the end of the tenancy.
My Deposits & Tenancy Deposit Scheme
Both My Deposits and the Tenancy Deposit Scheme offer an insurance based scheme. The landlord or letting agent pay a fee to insure the deposit against default by the landlord.
Landlord Insurance
Normal home insurance products are unlikely to pay out if a property is let. Landlord insurance is a specialist policy for rented properties which typically covers the building, contents that belongs to the landlord and often includes legal cover.
Landlord insurance may offer:
- Rent guarantee cover – offers protection should a tenant fail to pay rent or something causes the property to be inhospitable.
- Landlord liability cover – offers protection against compensation claims should somebody be injured due to an issue with the property.
Landlord insurance does not cover tenant belongings, and a tenant should take out their own contents insurance for this purpose.
Tenancy Agreements
A tenancy agreement should contain at least the following:
- The parties involved
- The duration of the tenancy and the date the tenancy started
- The initial deposit and how it is protected
- The rental amount, including the payment date and how it shall be paid
- Notice period for either party to end the tenancy
- The tenant’s obligations whilst renting the property
- Provision confirming the tenant is not liable for fair wear and tear
- Signatures of both the tenant and the landlord/letting agent
Repair & Maintenance Obligations
There are three main areas of responsibility set out for landlords in The Landlord and Tenant Act 1985:
Repair
The structure and exterior of the property must be in a good state of repair. A landlord must carry out any repairs required to restore their property to a fair condition. Final responsibility for the properties condition as safe and fit for use lies with the landlord.
Gas and electrical safety
The safety of gas installations and appliances is the responsibility of the landlord. Annual safety checks must be carried out. Regulations also apply to the safety of electrical installations and appliances. It is important to stay up to date with any changes to legislation.
Fire safety
Whilst not a compulsory requirement in all properties, it is recommended that landlords fit smoke and carbon monoxide detectors in properties they own. Any soft furnishing and fittings provided must adhere to the relevant standards.
Ending a Tenancy
Should the notice period expire without the tenant leaving the property, the landlord can start the eviction process. Without an eviction order, a landlord cannot forcibly remove the tenant.
If a landlord is seeking possession because the tenant has broken the terms of the agreement, for example not paying the rent, the landlord should use one of the reasons for possession specified in the Housing Act 1988.
Talk to our advisers
PO Box 17324
Tamworth
Staffordshire
B77 5WD
01827 259658
[email protected]