So, how is buying a property to rent different from buying a home to live in? The property price is of course the same but the type of funding available to purchase a Buy to let is different. Why? Because it carries more risk for the lender.
As an independent Mortgage Broker I have access to 30 lenders who combined are presently offering hundreds of deals for Buy to Lets Fixed and Tracker rates from 3.19% over base. The Lenders require capital of between 25-50% of the property value. They will also want you to demonstrate that rents of 125% are achievable. Obviously the less risk the lender is exposed to the better rate you will be able to get.
You may have heard stories about investing in Buy to Lets with ‘No Money Down’; strictly speaking this practice is illegal and frowned upon by lenders and the FSA and is one of the reasons so many property owners are now in financial difficulty.
The moral of the tale is if you are going to borrow money to buy property do it sensibly, treat tenants fairly and keep your property in a good state of repair. If you have confidence in the market and your ability as a Buy to Let Landlord then in the long term you will be rewarded handsomely.
To summarise you will need:
At least a 25% deposit.
Rents in excess of 125% of Mortgage repayments.
To demonstrate that you are a Credible Landlord (this may be evidence that you have already succeeded in the industry or that you have a business plan which clearly sets out how you are going to manage the property) or that you will be using an ARLA (Association of Residential Letting Agents) accredited property agent.
Although lenders don’t usually require it, it’s always a good idea to protect any loans you take out in case of the unexpected happening. For example you may become ill or even die unexpectedly and be unable to manage your portfolio, leaving your nearest and dearest responsible for repayments and management. For the sake of an extra few pounds a month much of the risk can be insured against.
The other factor that affects investors is the ongoing and terminal Tax considerations of Buy to Let Investments.
In the short term all rents are treated as income and should be declared on a Inland Revenue Self Assessment tax form within the property pages. The good news is that expenses of the letting business can be offset against the rent, for example:
Repair and maintenance Costs
On disposal of the property any Capital Gain (the difference between the buying and selling price less certain costs) is subject to Capital Gain Tax. There is now a single tax rate of 18% of the Gain. However in each tax year (April –April) individuals are entitled to make a Capital Gain of £10100 (2009/2010) before any gains are subject to Tax, it follows that if an investment is in joint names the entitlement increases to £20200 as two personal allowances are due. There are also special rules in place where you have personally lived in a property before disposal. For more information on Tax issues the Inland Revenue’s website http://www.hmrc.gov.uk is a great source to delve into.
Now you have read my Buy to Let Blogs do the Buy to Let Quiz.