Guide to Buy-to-Let

Like many good investments, buy-to-let should be seen as a long-term prospect. Making a fast buck is not an option, given fluctuation in the property and rental markets, and the lengthy time periods and relatively large costs involved in acquiring and disposing of property. But unlike many investments, buy-to-let has the potential, thanks to rising house prices and high rental yields, to deliver good income and good growth.
 

Can I afford it?

A mortgage broker or independent financial advisor will help you understand whether you can afford to buy-to-let. The terms for buy-to-let mortgages differ from a mortgage that you would take out to buy your own home. Charges are higher and they usually require a minimum deposit of 15% of the property value. Lenders calculate how much they are prepared to lend by reference to the amount of rent the property is expected to produce. Generally, this is about 125% of the monthly mortgage interest payment.

As well as money for deposit, it is a wise idea for you to keep aside cash, amounting to at least three months’ rent, in order to make mortgage payments during ‘void periods’ and cover agent fees and unexpected costs – the times when the property has no tenants.

To use a managing agent to look after your property will cost about 10% to 15% of the rental income, while simply using a letting agent to find a tenant is normally in the 5% to 10% range.

Getting mortgaged

A wide variety of buy-to-let mortgages are available, all of which are designed to withstand the short- to mid-term fluctuations of the rental market.

Rates are competitive, though not as cheap as ordinary residential mortgages. However, the rates are being eroded as the buy-to-let mortgage market matures and continues to become more competitive. Putting down a larger deposit than the minimum 15% will lead to an even broader choice of mortgages and cheaper rates.

Flexible schemes are a good way to weather the storm of void periods. Terms such as the ability to overpay and take payment holidays can prove extremely useful. Overpaying (by paying a month’s rent) when possible is advisable because it makes void periods more manageable.

You ought to adopt the same approach to a buy-to-let mortgage as you would to an ordinary residential one. So, be sure to review your mortgage arrangements regularly in order to maximise return. You may be able to make a significant saving (depending on early redemption penalties) by re-mortgaging onto a cheaper deal. Free re-mortgage deals are available.

Location and property type

Some areas tend to be over subscribed – particularly parts of London, Manchester and Newcastle. But with several hundred- thousand investment properties currently being rented in the UK, there is a very healthy balance of supply and demand in the sector.

Rent

Attracting tenants away from other landlords is made simpler by charging 5% or 10% less than what you think you could make – if, of course, you can afford to do so. This may be more cost effective in the long run because tenants are less likely to leave for somewhere with lower rent, thus avoiding the potential problem of a void period.

The future

Buy-to-let is a long-term investment and as such requires a long-term view, meaning short- to mid-term fluctuations in the market, in terms of rental demand and house prices, can be weathered.

But a positive spin can be made out of buy-to-let whatever extreme the market experiences. If house prices continue to escalate, rental demand will be supported by the number of first-time buyers who are either reluctant or unable to step onto the property ladder.

If house prices plummet (some private home owners fear that the current house price boom will lead to an Eighties-style bust), then many would-be buyers will play it safe and rent rather than purchase a property too early in a sinking market for fear that prices have not bottomed out. This situation, however, is unlikely in our current stable economy of low interest rates and low inflation.