How Buy to Let Mortgages Work

If you want to rent out a property here in the UK then you’ll need to get a buy to let mortgage. It’s as simple – and as basic – as that.  

Many ‘accidental’ landlords continue using their residential mortgage when they move out and decide to let. But that’s not advisable. Not only will it invalidate any future insurance claims you make for your property, but it’s also likely to land you a big fine from your mortgage company if it’s discovered. So, it’s definitely not worth the risk. 

What Is the Difference Between Residential and Buy to Let Mortgage?

A buy to let mortgage is different from a residential mortgage in a number of ways. Firstly, the interest rate is higher and secondly you only pay back the interest (then settle the capital side at the end). With respect to the latter it means your income from renting the property won’t all be put towards paying off your mortgage. And, in fact, buy to let mortgage lenders will take this rental income into account when deciding how much to lend you.  

Another aspect of a buy to let mortgage that differs from a residential mortgage, is how much money you are expected to put down as a deposit. In many cases you’ll be expected to provide 40 per cent of the property’s value. 

Before Getting a Buy to Let Mortgage

Location

Be very careful about the location of the property you choose to take out a buy to let mortgage on. Ask yourself, for instance, if it’s in the right spot for your chosen target market. If that’s students, then is within walking distance of a college or university and are there plenty of amenities, such as pubs and coffee shops nearby? If it’s families you want to rent to, are there good schools in the locale, as well as parks?

Void Periods

When doing your sums about whether or not you can afford the buy to let mortgage, remember your property won’t always be rented out. That means there may be some months you may not receive a rental income. You’ll do your best to always have it rent out, of course. But that’s not guaranteed. Void periods happen even to the most conscientious of landlords. You can take out landlord insurance to cover these, but it’ll cost you extra.

Repairs and Maintenance

Calculate the possible costs of maintenance and repairs when working out your mortgage. This includes such unexpected occurrences such as a burst pipe, your boiler breaking down or even a damp proofing course. These can all run into hundreds of pounds in costs.  

Then there are the on-going maintenance charges, such as upkeep of the communal stairwell if it’s an apartment, together with grass cutting, painting, roof repairs etc (all of which is usually covered by a management company and which you will have to pay a monthly fee to). 

Letting Fees

If you’re not going to be a hands-on landlord (ie looking after rent collection, maintenance issues etc yourself) then you will have to pay a monthly fee for a letting agent. Often a letting agent and management company are the same thing – but not always. This usually works out at 10% to 14% the cost of your annual rent – so, again, it’s not a negligible fee. 

Tax

There will be tax implications. You’ll have to add your rental income to what you receive in salary and if it’s over the personal allowance (currently around £12,500) then you’ll pay tax on that rental income.

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