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Buy-to-Let Mortgages: The Basics Covered

Buy-to-let property remains an attractive investment opportunity as savings rates remain low and house price growth remains strong. Learn more about securing a mortgage on rental property by reading our guide below!
Buy-to-Let Mortgages: The Basics Covered

 

The buy-to-let sector has seen a resurgence in the last few years. An increasing number of people have found themselves trapped in a cycle of rent, partly because they have found it so difficult to build a deposit towards their own home.

 

House prices are rising much faster than wages, and it is likely that those with cash at their disposal will maintain a strong position in the marketplace.

 

The opportunities are there for buy-to-let landlords. However, it is still important to find the right property.

 

Research

One of the main factors that will determine a successful property investment is the buyer's research of the market. Your money would be better served by a stable savings account than a property which fell in value or that remained unoccupied for long periods.

 

It’s also worth considering that investment ISAs are a particularly tax efficient option, with no tax on capital growth. (Did you know that you can now claim AIM shares as part of your investment ISA allowance? Find out more.)

 

So, even in a strengthening housing market, there’s still no cast-iron guarantee that an investment in property is automatically the best option. Plenty of planning and forethought are likely to help you convert your cash into a solid investment opportunity.

 

It's wise to ask yourself: in which regions are rental yields strong? Where is the annual rent level increasing rather than decreasing?

 

Projections released earlier this year by letting agents Countrywide suggest that yields are particularly strong in the North and the Midlands as well as in Wales. (For more on yields, see Returns below.)

 

What’s Affordable?

Before spending time investigating potential buy-to-let properties, it’s worth working out what’s affordable and the level of rental income that you are likely to need to make a deal work for you.

 

As a new landlord, the amount you will be able to borrow will almost certainly be linked to the rental income you expect to receive from the property once it is tenanted. Lenders usually prefer rental income to exceed the mortgage repayment by 25%.

 

It will therefore be useful to check out realistic rental prices on properties in your preferred areas, to make sure that you’re not going to be pricing tenants out of the market.

 

(For more on this, see our guide: Working out Rent and Costs.)

 

The Area

As a buy-to-let landlord, you are encouraged to think as a customer. Why might prospective tenants want to live in a particular area?

 

How well do the local schools perform? Finding a property near a good school is likely to prove more attractive to families with children.

 

A good range of shops, supermarkets and amenities in the vicinity is also a plus, while the range and frequency of public transport services is likely to determine whether a property is suitable only for those with access to their own vehicle.

 

Certainly, being within walking distance of a bus or railway station or a shopping precinct will make a property more desirable. This means that your best investment opportunity might not be the cheapest property available at the time.

 

It is important not to think solely in terms of cost, but also where a property fits in with the potential target tenant group(s).

 

Modern Home

 

Property

Which property types are likely to work for you? Is a four bedroom property as likely to appeal to your target tenants as a two bedroom property?

 

Students are more likely to want to share in large groups, but family homes with four bedrooms may appeal to fewer tenant groups. Property types with fewer rooms – one or two-bedroom homes or flats – are likely to carry broader appeal.

 

But with the shared equity schemes now in place to help buyers and the availability of cheaper mortgages, it is likely that many more people will be pursuing this property type.

 

How, then, do you gain your advantage? Firstly, it’s worth remembering that if you are not in a chain or tied into a fixed rental contract until a set date, you are in a stronger buying position. This may work in your favour when it comes to negotiations.

 

Alternatively, it might be worth considering properties in need of renovation, not least because there’s more chance of driving a hard bargain. Spending to improve a property should reduce the chances of you making a loss on your investment.

 

Tenants

You may be starting out with a target property type and target tenant type in mind. It may be that your target tenant group ends up changing according to the properties that appeal to you as the right investment.

 

In either case, to market this effectively, you will have to imagine your target tenants and think as they do.

 

If you’re planning to target students, it is little use targeting a property located miles away from a campus or with no transport links.

 

However, students are more likely to be attracted to a property with basic and durable furniture, whereas families are more likely to have their own possessions and may be put off by a cluttered property with no storage.

 

The Returns

The housing market is in the midst of a strong recovery. Prices are moving upwards at a steady pace in England and Wales, with much larger increases in London.

 

How sustainable this is remains unclear. But if you are investing for long-term income, a useful measure of a property’s ‘performance’ will be its yield – the amount of rent it generates each year relative to its price. If a property costs £150,000 and generates rent at £600 per month (£7,200 per year), it has a yield of 4.8%.

 

Ideally, you will want the rental return to come in well above the outgoing mortgage payments. This will help to cover additional costs, such as maintenance, agents fees (if applicable), and the periods of vacancy between tenants.

 

A strong rental income will help you build an annual return that can be saved or invested. This can go towards paying off the mortgage at the end of the term (if interest-only) or alternatively towards future investments or retirement income.

 

Positive Housing Market

 

Finding the Right Mortgage

If you walked into your bank and enquired about a buy-to-let mortgage, what guarantee would you have that you would be getting the best deal?

 

With a comparison site like Which4U, you can compare the different offers currently available on buy-to-let mortgages.

 

Would you benefit more from a fixed-rate mortgage or a tracker mortgage? Our guide here might help you decide.

 

Another tip is not to overlook smaller local lenders, as these can often outperform the big banks if you meet their lending criteria.

 

You can always consult a mortgage broker for extra advice, though don’t be bullied into paying fees for advice or signing any contract unnecessarily.

 

Servicing

How will you choose to manage your property? Will you let it yourself and dealing with the admin and the maintenance issues? Or will you use an agency, which charges a fee but manages issues on your behalf?

 

If you’re fortunate enough to purchase a good quality property with few maintenance issues and secure a long-term tenant, there is a good saving to be made by eschewing agents. But if you do decide to go it alone, you may end up surrendering a lot of time to finding tenants and dealing with visits, inspections and repairs.

 

The popularity of buy-to-let property has ensured that there are plenty of letting agencies fighting for your custom. Shop around to negotiate for the best deal. If you can drive the management cost down from 10% of your rental income per month to around 8%, this can represent a decent saving over the course of a year.

 

When Things Go Wrong

The last decade has given us plenty of insight into how things can go terribly wrong. Property prices can go down as well as up.

 

There is no guarantee that properties will be taken up, even in strong areas. And there is always the risk of tenants defaulting on their rent.

 

There could also be major problems with the property. If the boiler fails or any structural damage to the property occurs, can you afford to make the repairs? If not, it might not be the right time to proceed with your buy-to-let project.

 

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As always, we recommend that you seek professional advice if you are unsure which type of mortgage is right for you. All of the above information is provided as an overview only and should not be taken as the basis for your mortgage decision.

 

Keith McDonald

Which4U Editor

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