The term ‘buy to let’ generally refers to either the practise of buying a property to be let for profit, or to the type of mortgages used to purchase a property for such letting.
Many countries, both in the western world and in the developing nations, have seen a surge in the growth of the buy to let property market in the last 2 decades and this has fuelled a growth in amateur landlords and the but to let mortgage providers who are keen to encourage and profit from them in turn. In addition, this growth has generated alot of commerce in other related sectors such as buy to let insurance.
Buy to let mortgages have been available in the UK since the mid nineties and they are specifically designed for investors to borrow money to purchase property in the private rental sector. The amount that a prospective but to let investor can borrow is generally determined by the rental valuation of the property. The annual income for a rented property has to cover a certain percentage of the mortgage repayments, the Association of Residential Letting Agents (ARLA) states that landlords should seek to be able to obtain gross rent returns equivalent to between 130 per cent and 150 per cent of the rental property’s mortgage repayments, this takes into account the surplus rent to cover costs of property maintenance and slack periods when the property may be vacant of tenants.
But To Let Mortgages
Some buy to let mortgage lenders will lend you a maximum sum based on a multiple of your salary (usually a multiple of three) plus a percentage of the forecast rental income on the property. So if your annual salary is say £30,000 and the forecast rental income is £10,000 they will lend you £95,000. Other mortgages, in addition to factoring in your salasry, will include any existing loan commitments you have, and then apply what is known as the ‘deduction rule’. This rule relates to the annual mortgage payments worked out at a pre-set level of interest. Taking the same example as before, lets say the lender puts up 3.5 times your annual income (£30,000 per year), and you have an outstanding mortgage balance on your property of £100,000. If the annual mortgage repayments are calculated at a fixed level of interest for the year to be £10,000, then this is dedecuted from your salary to leave £20,000, which is then multiplied by 3.5 to calculate the figure you are allowed to borrow ie. in this case this equates to £70,000.
Buy to let mortage interest rates are generally fairly close to residential mortgage rates but will generally be slightly higher and typically charge higher fees. This is due to the fact that buy to let loans are considered by the financial sector to represent a greater risk than residential owner-occupier mortgages, and they generally are.
The Situation in the UK
The buy to let market literally ‘exploded’ in the UK around the beginning of the millenium with rising property prices and the increasing availability of buy to let funding fuelling a surge in would-be investors trying to cash in on the trend of the market. Increasing property prices made it more difficult for some sectors of the population to get onto the property ladder, and couple with rising population figures, especially in the cities, due to increasing number of overseas settlers, increased demand in the rental sector. Another reason for their popularity is the tax advantages that are available to UK buy to let investors. Rental income is treated just like a salary by the Inland Revenue, and is therefore often taxed at 22% or even 40%. However, landlords are allowed to deduct costs from the taxable portion of their rental income, and these costs can include the interest of the buy to let mortgage repayments as well as maintenance costs on the property. These tax incentives made the buy to let market very attractive for both professional investors and amateurs looking to make the most out of their savings.
Would Be Investors
The market peaked around 2007 and now the market is saturated in many areas across the country with too many properties available to tenants. Lending experts generally stress however, that buy to let has never been a get rich quick scheme but a long-term investment. While buy to let is generally not a good idea for people who do not possess some extra budget there are alot of remortgage deals which will fund a deposit for a home. If you are worried about losing money during void periods many companies will provide insurance which can deliver as much as six months mortgage payments in the event of a property remaining unoccupied.
You can still be lucky, and find a hotspot and make a killing but you need to do your homwwork and the figures correctly. Buy t -let trends differ from town to town and literally from street to street. Good advice for a potential investors is to visit the local letting agents who should be able to tell you who is renting what at the moment so you can define your target audience. It could be students, young professionals or families, for example. Look for areas that do have a shortage of properties and for indicators that people will move there, such as new business developments. There are are which are undoubtedly saturated at present, such as London and places with big student populations like Manchester, but there are still pockets of the country where there is good demand for reasonably priced properties. The Thames Valley and M4 corridor for example, where there is high employment – mainly through contract work has alwasy been a lucrative area.
Buy to let mortgage deals are still rife and the rates are almost as competitive as with conventional deals. The main difference is that because you pose more of a risk to your lender by letting a property you’ll have to fork out a larger deposit and pay higher fees. Usually the deposit is a minimum of 20 per cent of the value of the property you’re intending to buy. First-time landlords are deemed a greater risk and therefore they are generally required to put up a larger deposit. First-time landlords will also have to prove they have a minimum income of £40,000.
Another indication of the success of buy-to-let as an investment is the choice you have of paying off your home loan . Just like with conventional deals you can choose from fixed, discounted, variable and tracker mortgage products. You can even choose a combination and flexible options are becoming increasingly common. Flexible mortgages allow the borrower to overpay, underpay, take payment holidays, borrow back from the mortgage and benefit from daily interest calculation. These options can be a godsend as it allows you to overpay when you have tenants and money coming in, then take payment holidays if you need to during void periods when you don’t have rent coming in. You can also draw down money if you want to carry out work or repairs you your property.
But the more profit you make on your investment the less you have to worry about mortgage payments. Tax will be a concern, however. Any profit you make on your buy-to-let investment will be classed as income and you will be taxed on it at the appropriate rate for you. For example, 22 per cent if you earn £30,500 or less. However, as the profit is added to your main salary it might push you over to the next tax bracket. A good trick if you care married to someone who is on a lower tax band is to put the property in their name.
Investors need to look at what they want. Do you want income or capital appreciation? If you’re looking for capital appreciation you can be more flexible with your rent because you wouldn’t be relying on an income from a tenant. You can charge rent that undercuts the going rate for the area so there’s always demand. If you want to generate an income you need a good return so you’ll need to be sure you’ve got premium tenants paying premium rents. In either case, the mantra with your buy-to-let must be ‘don’t expect to get rich quickly’. You need to look long-term: an absolute minimum of five years – but probably nearer to ten years.
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