Purchasing a buy-to-let property is a popular investment as the income it creates is twofold. Firstly, you will receive money in the form of rent through letting it out, and secondly there’s the potential that the property price will increase and result in a profit when you come to sell it.
If you’re considering investing in your first buy-to-let property, it’s likely you’ll have lots of questions about what this involves. In this article, we answer some of the most common questions to help you through the process.
Why do I need a buy-to-let mortgage?
If you’re hoping to rent out a property you will need to have a buy-to-let mortgage rather than a residential mortgage. You can only take out a residential mortgage on a property that you’re going to be living in yourself and would not be able to then rent this out. There are a number of buy-to-let mortgage options out there which cover a range of circumstances but finding one can be trickier than applying for a residential mortgage.
Buy-to-let and residential mortgage differences
There are a few important differences between buy-to-let and residential mortgages. Firstly, many lenders offering buy-to-let mortgages will require you to have owned your own residential property which could make it more difficult to find a lender if you’re hoping for your first property to be buy-to-let. You’ll also need to have a larger deposit than most residential mortgages require. This is typically 25% for a buy-to-let mortgage but can range between 20% and 40% – so it’s worth shopping around.
You’ll also find that buy-to-let mortgage interest rates are higher than those charged for a residential mortgage. This is because lenders perceive more risk when it comes to rental properties as there may be months where no rent is paid etc. In addition to this, many buy-to-let mortgages are interest only, which means that you’ll only pay the interest each month and won’t reduce the loan amount. Interest rates for a buy-to-let mortgage are around 1% higher than a residential mortgage on average.
What other buy-to-let costs do I need to consider?
In addition to your monthly payments, there are some other buy-to-let costs that you need to be aware of. As a landlord, you will need to pay tax on the rental income you receive. This could be anything up to 45% depending on which tax bracket you’re in so it’s vital that you take this into consideration when working out how much money you’ll be making. You’ll also be required to pay an extra 3% on top of the standard stamp duty rate when purchasing a buy-to-let property. For example, on a residential mortgage you wouldn’t pay stamp duty on a property below £250,000, but for a buy-to-let property you’d pay 3%.
There are other costs linked to having a buy-to-let property which you may not have thought about yet. Landlord insurance is one of these costs and is vital in ensuring that you’re protected whilst renting out your property. Landlord insurance can cover everything from damage caused to fixtures and fittings to unpaid rent, so it’s certainly worth having for peace of mind. You’ll also need to have funds available should anything go wrong in the property as you’ll be responsible for rectifying any issues. This could be replacing a broken washing machine or carrying out general maintenance.
Before taking on a buy-to-let mortgage, it’s important that you consider if you’d still be able to make your mortgage payment if you don’t receive rent – this could be due to a tenant not paying you or if your property is empty while a tenant is found. The mortgage company will assess whether you are too much of a risk, but it will be down to you do ensure that all payments are made on time, regardless of whether you’re receiving rent or not. Failure to do so could result in having the property repossessed which is why any decision should be made with caution.
Buy-to-let mortgages can be a great investment for those who take the time to research whether it’s a viable option for them, and we’re here to help.
Download our free buy-to-let guide here.