Buy to let guide | pros & cons

What is a buy-to-let?

You may have heard of buy-to-let, but never quite understood exactly what it means. Buy-to-let is when you buy a property intending to let it to another person as their home. They, therefore, rent the property as your tenant and you as their landlord. 

How does a buy-to-let work?

Once you buy a property as a buy-to-let, you rent it out to someone as their home and charge them rent. If you are not a cash buyer, and currently have a mortgage for a buy-to-let property, you will charge rent at a higher rate than your mortgage repayments and other fees to make a profit from your property purchase.

Buy-to-let properties are, therefore, a type of investment over which you have some control and can be hands-on if you wish.

Do you need a specific buy-to-let mortgage?

When you choose to purchase a property as a buy-to-let property, you have to get a specific type of mortgage for this which is a buy-to-let mortgage. A buy-to-let mortgage application can take between four to six weeks with a further four weeks for completion if all goes smoothly. 

A buy-to-let mortgage works in the same way as a regular mortgage in the sense that you borrow a sum of money for a specific time, but it does have some key differences such as the following:

• your monthly payments are usually just the interest on the loan leaving you to either pay the full loan amount, sell the buy-to-let property or remortgage once your mortgage reaches the end of its term 
• the mortgage is based on what your likely rental payment will be rather than your income
• the deposit will be more than a normal property purchase 
• interest rates will be higher than normal mortgages

How much deposit do you need?

The deposit for a buy-to-let mortgage is higher than a regular mortgage because the buy-to-let property is considered a riskier purchase. A buy-to-let deposit will likely be at least 25%. However, if you can afford a larger deposit it is worth considering as you will get a better deal. If you can afford 40% of the property price, you are likely to get a better mortgage deal. Also, you may need to provide a larger deposit when the estimated rental price of your buy-to-let property (Loan to Value LTV) is not high enough. 

How much could you borrow with a buy-to-let mortgage?

When you borrow with a buy-to-let mortgage, the amount depends on the predicted property rental price. The Bank of England introduced Interest Cover Ratios (ICRs) which measure the ratio between the rental amount you are likely to receive and what your mortgage repayments will be. However, some mortgage providers may take into account other income. 

An ICR can vary between mortgage lenders and can be between 125% and 145% of rental income against remortgage repayments. Therefore, if your expected rent is £1250 per month, at a 125% ratio, your mortgage repayments would be £1000 per month. 

Are there any additional costs and taxes you need to consider?

In addition to your mortgage fees and deposit costs, you need to consider Stamp Duty for your buy-to-let property. It is likely when you choose to purchase a buy-to-let property that you will already own property. If so, as your second property, the buy-to-let property will incur Stamp Duty at a higher rate. This increases in amount with the property value.

As a buy-to-let property provides you with an income, you will need to pay income tax on it also. However, you can deduct expenses such as:

• maintenance
• insurance
• utility bills
• letting agent fees
• survey fees
• legal fees

You may need to factor in renovations and improvements to the property to bring it up to an adequate standard to let. 

No matter the complexities of purchasing a buy-to-let property, Homeward Legal do not add any surplus fees as this is all included within our guaranteed fixed legal fee.

Are there any restrictions when purchasing a buy-to-let property?

In addition to the restrictions on how much you can borrow, It can be difficult to get a buy-to-let mortgage as a first-time buyer, although it is still possible. Some lenders place further restrictions on a buy-to-let mortgage. This can include:

• needing good credit
• showing evidence of income
• not to be older than 75 years

Also, if your buy-to-let property is for a close family member to live in, you are restricted to a consumer buy-to-let mortgage which has the same affordability rules as when you take out a normal residential mortgage. 

Also, if you are a portfolio landlord, which means you own at least four properties, some mortgage providers restrict the number of properties you can have in your portfolio. There can also be restrictions when you wish to borrow more money in terms of what you need to show, which can include for each of your properties:

• mortgage details
• cash flow projects
• business case models

What are the pros and cons of a buy-to-let?

The pros for purchasing a buy-to-let property pretty much speak for themselves. A buy-to-let property, for example, provides you with additional income as well as an investment, and with interest-only mortgage repayments, it can be a good way to see money quickly. 

However, there are some cons. Mortgage rates for buy-to-let mortgages were high this year compared to a couple of years ago. Also, if you are not planning a long-term buy-to-let property, you need to check property prices are not falling as the price could have fallen when you sell it.

Think of buying a buy-to-let property?

If you have decided you want to buy a buy-to-let property in the UK, you may need help with the conveyancing process. Even if you have bought property before, as this is a buy-to-let purchase, the conveyancing process for this may be new to you. 

It is essential to have a conveyancing solicitor to help with the conveyancing process to get the legal work for your buy-to-let property carried out correctly. You may need, for example, the differences in the buy-to-let mortgage. For example, at Homeward Legal we can help you with all that you need to know about the buy-to-let process and ensure the buying of your property goes as planned.

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