How does Buy To Let work?

So – you’ve heard that Buy To Let is an easy investment – a sure-fire short-cut to a lifetime of untold wealth and financial security? Well, wouldn’t that be nice? If only it were true. Certainly, Buy To Let can be an excellent way to invest. But there can be potential pitfalls. Let’s look at how Buy To Let works.

What is Buy To Let?‍

It’s simply buying a property that you then rent out to someone else. The key element is the mortgage you take out to buy the property. You use a specific Buy To Let mortgage – different in structure from the standard type of mortgage that you might take out to buy the home you live in. A Buy To Let mortgage enables you to buy property as an investment without needing to save up for the full amount to buy it outright. You then rent out the property, such that the rental payments cover the mortgage and your other costs.

How do you make money from Buy To Let‍

The rent you earn will pay your mortgage, but you almost always earn a profit too – in two ways

1. Your rental income
   The rent you charge should be more than your monthly mortgage repayments. You’ll need this extra buffer to pay for other costs, such as repairs and letting agent fees (you may decide to do the letting yourself, which can come with its own costs, such as difficulty in collecting the rent). If all goes well, there should still be residual income left over for you to take as profit.
2. Capital growth
   Provided the price of your property increases by more than the rate of inflation, then, of course, there’s profit to be made when you sell it.

Are there different types of buy to let mortgage?‍

There are two main types.

Interest-only repayments‍

Most Buy To Let mortgages are interest-only. This means your monthly repayments only cover the interest you owe. The amount you borrowed won’t reduce.

Repayment mortgage‍

By the end of the mortgage term, this pays off the whole amount you borrowed plus the interest, enabling you to choose between either 

• keeping the property and continuing to rent it out, keeping all of the rental income for yourself
• selling it and keeping the full amount of the sale

How much does Buy To Let cost?‍

You have to budget for more than just the cost of the property you’re buying. As with any such purchase, there will added costs – often at a higher rate than for conventional residential purchases - 

• Legal fees
• Your deposit – the lender often need a deposit of at least 25%
• Mortgage fees – such as an arrangement fee. These re often higher for Buy To Let mortgages.
• Stamp duty -  the amount is currently an extra 3% higher for Buy To Let than for normal residential purchases.

Don’t forget ongoing costs of owning your property‍

The deal is done. The property is mine. Am I now home and dry? When will I start to see a return on my investment? Not so fast. You’ve a way to go yet. Bear in mind the following probable costs - 

• Renovating your property – making it legally safe and sufficiently attractive to rent.
• Paying letting agents for advertising the property and managing your tenants - usually charged as a percentage of the rental income.
• Maintaining your property

What about tax on my Buy To Let investment‍

You’ll have tax to pay on any profits you make from your Buy To Let investment. This might include -

• Income tax on profits you make from rental income
• Capital gains tax on profits you make from selling the property

But you will be able to reduce your taxable profits by deducting certain allowable expenses, such as 

• Maintenance and repairs
• Insurance
• Letting agent fees
• Any utility bills you pay

Will I be able to get a Buy To Let mortgage?‍

Each lender will have different requirements. Their key concern will be – can you afford the repayments? They’ll consider

• how much rental income they expect you can earn from the property. They’ll be looking for a figure of 125% of your mortgage repayment.
• your financial circumstances – namely your credit record, your other income, your outgoings and debts, the size of deposit you’re prepared to put down.

What are the risks of Buy To Let?‍

Things could start to go seriously wrong if -

• Your property is empty, and you have no rent coming in
• You need to pay for unexpected expensive repairs
• You have problem tenants who are unreliable at paying the rent or damage the property
• Interest rates rise, pushing up your monthly repayments
• House prices fall, and you end up selling the house for less than you paid for it.

How do I make a start with Buy To Let?

1. Decide if you can afford to invest in property and if it fits in with your life goals.
2. Carefully choose a property that is within your budget and is attractive to prospective tenants.
3. Talk to us about taking the first few steps.

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