Buy To Let

Learn all about Buy To Let. The business, the process and the pros and cons.

Buy To Let

Why Buy Property To Rent Out?

Since the property boom at the turn of the century, people have been buying property with the sole intention of renting as a means of investment or additional income.

As an investment a Buy To Let can make money in two ways:

  • House Price Inflation - The property appreciates in value whilst the mortgage on it is paid by the tenants. Improvements made to the property may also increase its value.
  • Rental Yield - The amount of money received in rent, minus costs and taxes, exceeds the interest payment on the mortgage.

People investing into property would in the past have put their money into savings, pensions or possibly stocks.

The risks are inherent as the credit crunch showed and there are many points to consider.

Due to the terms of Lenders agreements with their own insurers, if you are purchasing a property to let with a mortgage, you need to use a Buy To Let mortgage. These can be found with the same rate types as with regular residential mortgages, but have a different means to assess how you can afford to repay them.

Buy To Let Loan To Value

When the Buy To Let mortgage market was at its strongest and Lenders were less risk averse, it was common to be able to get a Loan To Value of up to 90% or more on buy to let mortgages - with the application process being relatively simple as long as you credit and ability to rent the property was sound.

The market has now changed however, and Lenders are picky over the type of property they will even consider lending and the maximum loan to values are more commonly around 75%. For example, City Centre apartments are no longer attractive to lenders, with many repossessions around the country. Lenders may ask for quite a large deposit (up to 50%) in order to consider lending on a buy to let mortgage. Other property types such as flats over shops and former council houses/flats are also undesirable.

Rental Yield

Lenders would typically require proof from a recognised estate agent of the ability to rent a property and the monthly rental income must at least be 125% of the mortgage payment.

For example, a rental property with a mortgage payment of £500 would need to be able to take a monthly rent of £625.

Multiple Rentals (Rental Portfolio)

If you can prove your ability to manage, successfully, rental properties and keep mortgage payments healthy, you can build a relationship with your lender and build up a portfolio of rental properties. Terms can be softened as the risk to the lender falls. You may have some properties which at periods yield more than others, effectively covering the loss of some of your portfolio with the profit of others - and remaining even.

Tax on Rental Properties

Although you can get a repayment mortgage type, most Buy To Lets are taken on as interest only loans in order to keep costs at a minimum.

Taxation would therefore involve:

  • A. Monthly Rental Payment
  • B. Subtract interest portion of Mortgage Payment
  • C. Subtract costs
  • D. Remaining profit is subject to income tax only.

You can estimate the tax on rental property using the UK Tax Calculators Wizard For Multiple Incomes.

If you take on a repayment mortgage, you are less at risk of house prices falling and therefore becoming stuck with a property worth less than you owe on it - making remortgaging difficult.

You can help prevent situations like this by investing as much as possible into the property and keeping the mortgage as small as possible.

Growing your Portfolio

If we take 25% as a deposit amount required, then in order to purchase your next buy to let property you will need to have 25% of the value available in cash.

There are methods where you can obtain the 25% by remortgaging your existing buy to let property, however this is reliant upon it having appreciated in value. You can essentially release equity from existing property in your portfolio by adding value by improvements or general house price inflation, and then use the money as a deposit on another buy to let property.

This is called increasing your gearing ratio (the proportion of borrowing against the value of your properties). Whilst in boom time this can work in your favour, were house prices to fall, losses could be massive.

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£150 invested every month for 3 years. Does not take into account taxation, inflation or charges, you can get a full breakdown click get more info.

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Mortgage Assumptions

  • Fees

    All fees charged will be paid upfront rather than added to the cost of the mortgage.

  • Costs

    Total costs consist of the full monthly payment amount over the comparison period, plus the upfront fees.

  • Offer Period

    When a initial interest rate offer ends, the monthly payment will be recalculated at the standard rate based upon the remaining balance at the time.

  • Tracker and Discount Rates

    With tracker and discount mortgages, please note that the costs will assume the base rate or lenders variable rate stay the same as now for the duration of the comparison.

Loan Assumptions

  • Fees

    No fees have been taken into account.

  • Costs

    Total costs consist of the total INTEREST charged over the term of the loan.

Credit Card Assumptions

  • Fees

    Balance Transfer fees will be added to the balance transfer balance on the card.

  • Minimum Payments

    Payments will be assumed to be made at either 3% of the total outstanding balance or £5, whichever is the higher.

  • Payment Priority

    Balances will be paid off in the following order: 1. Purchases, 2. Balance Transfers.

  • Rate Offers

    When the offer period on a promotional/initial rate expires, interest will be charged at the normal rate.

  • Total Costs

    These take into account the amount of INTEREST charged during the comparison period.

Savings Assumptions

  • Charges

    No charges are taken into consideration when calculating costs.

  • Taxes

    For ISA's, no tax will be deducted from earned interest. For other account types, 20% tax will be deducted at the point the interest in paid.

  • Bonus Rates

    When bonus rates expire, the interest rate will revert to the normal rate advertised. In the case of fixed rate bonds, once the bond period ends, no interest will be paid.

  • Interest Period

    Monthly interest in calculated and paid monthly. Annual interest will be calculated monthly, but paid on the anniversary of the starting date. Interest will be paid pro-rata if the comparison period ends before an anniversary.

  • Total Costs

    These take into account the total value accrued in your savings at the end of savings term. It does not take into account inflation.

Investments Assumptions

The Investments category displays Stocks and Share ISA deals only.

  • Charges

    No initial, annual or per deposit charges are taken into consideration when calculating costs.

  • Taxes

    For ISA's, no tax will be deducted from the annualised growth.

  • Rates

    Using past performance figures, we have created a compounded annual growth rate to provide a annual percentage figure to calculate growth against. This is from past performance and is NOT an indication of the future performance of the fund.

  • Interest Period

    Annual growth will be calculated monthly, but added on the anniversary of the starting date. Growth will be added pro-rata if the comparison period ends before an anniversary.

  • Total Fund Value

    This takes into account the total value of your fund at the end of invested period. It does not take into account inflation.

Pensions Assumptions

The Pensions Category displays a small selection of pensions only.

  • Charges

    No initial, annual or per deposit charges are taken into consideration when calculating costs.

  • Taxes

    No tax will be deducted from the annualised growth.

  • Rates

    Using past performance figures, we have created a compounded annual growth rate to provide a annual percentage figure to calculate growth against. This is from past performance and is NOT an indication of the future performance of the Pension.

  • Interest Period

    Annual growth will be calculated monthly, but added on the anniversary of the starting date. Growth will be added pro-rata if the comparison period ends before an anniversary.

  • Pension Value

    This takes into account the total value of your pension at the end of invested period. It does not take into account inflation.

  • Fixed Rates

    The interest rate charged is fixed for a number of years or until a certain date by the lender.

  • Base Rate Tracker

    The interest rate is set and then tracks the rises and falls of the Bank of England's base interest rate which is decided monthly.

  • Discount

    The interest rate is the lenders standard variable rate, which they decide. The discount period gives you a certain amount off that rate. The rate can be changed at anytime by the lender.

  • Variable

    The interest rate is the lenders standard variable rate, which they decide and can change anytime.

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What is the value of the property for which a mortgage is required?

How much do you need to borrow?

  • Capital + Interest

    Payments made to the lender will repay the amount borrowed as well as cover interest.

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    Payments made to the lender will only cover interest. You will need to put money aside elsewhere in order to be able to repay the actual amount borrowed.

What is the minimum period for which you want the interest rate offer?

For example, for a minimum 3 year interest rate offer, select 3 years.

Tick to remove mortgages that have Early Repayment Charges.

Early Repayment Charges are applied by the lender if you repay the mortgage, or remortgage to a different lender within a certain period of time or date set by the lender. Typically a percentage of the outstanding balance at the point of repayment.

Tick to remove mortgages that have any fees.

Lenders may apply fees such as arrangement, booking or valuation fees when you take out the mortgage.

Tick to only show Buy To Let mortgages. If you are purchasing/remortgaging a property which is to be rented to tenants, this is the type of mortgage you will need.

Tick to only show Offset mortgages. Offset mortgages allow you to use you savings or regular income to reduce the amount of interest you are charged on your mortgage.

How many years do you wish to spread your mortgage over?

  • Good Credit

    If you have zero missed payments in the last 2 years, no CCJ's or defaults these deals may be available to you.

  • Fair Credit

    If you have missed a few payments as recently as the last 6 months, these deals may be available to you.

  • Bad Credit

    If you have missed payments in the past, had CCJ's or defaults, lenders in this category may have deals for you.

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Over how many years do you wish to spread this loan?

Tick to show only loans that include some form of payment break

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  • Good Credit

    If you have zero missed payments in the last 2 years, no CCJ's or defaults these deals may be available to you.

  • Fair Credit

    If you have missed a few payments as recently as the last 6 months, these deals may be available to you.

  • Bad Credit

    If you have missed payments in the past, had CCJ's or defaults, lenders in this category may have deals for you.

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How much money do you have to deposit?

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Enter the minimum past annual growth percentage for funds you wish to see.

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