Buying a buy to let property seems like an easy way of making money. If we imagine a £100k purchase, £25,000 deposit and a 4% interest rate, it’s possible to purchase something that will make you £600 a month in rent. That mortgage will cost £250 a month, so your profit of £350 will give you a gross yield of 16%! You don’t get that from any other financial institutions. So why isn’t everyone doing Buy to Let?
The reality is that the gross yield ignores all of the other costs involved in finding the property and arranging the purchase (travel, mortgage fees, solicitor fees, other reports and documentation requirements), ensuring the property is suitable for rental (anything from painting and decorating through to a complete refurbishment), the sourcing of a tenant (letting agency fees, inventory, safety certificates and tenancy agreement) and then the ongoing cost of maintaining and repairing the property, and of course the lost income in-between tenants, or worst case, the cost of evicting a tenant that won’t pay. Lenders charge much higher rates and fees for Buy to Let mortgages and so it’s not unusual to find rates over 1% than residential rates and fees between £1000 and £2500. Buy to let lenders also expect a much greater deposit too, typically 25% or more, however there are deals where 15% and 20% is acceptable.
There are many different reasons to consider Buy to Let and each strategy will require attention to different metrics. For instance buying a property in London will almost certainly give you a far higher capital appreciation than a smaller property further North in the country, however the gross yield will be far smaller and you will likely need a larger deposit. If you bought smaller, or further North, you may see a much better gross yield, and therefore better cash-flow, but will be more vulnerable to the peaks and troughs and may not stand to gain as much in terms of appreciation.
One thing that is certain however is that owning a selection of property will give you a far better spread of risk, better control over your cash-flow and much a far more efficient management.
Here at AALTO Mortgage and Property Solutions we are experts in Buy to Let and have a deep understanding of the entire process. We can help you to decide on a strategy, give you tools to help select and balance between the most profitable and the most efficient or reliable property to invest.
We have an extensive array of services available with impartial advice (we just like talking about the things we are passionate about!); incorporating our zero broker fee promise for all clients (we are paid commission by the lender), new or existing (we get paid a commission from the lender); Solicitors we use time and again who provide an efficient service for reasonable fees and who work in a progressive way with regular email updates, and we can advise and arrange the required insurances to safeguard your investments.
Below you will find a number of more detailed subheadings investigating some of the common factors in buying into Buy to Let. Nothing beats speaking to a professional advisor and talking through your plans, we would be happy to help and urge you to call, however we also believe in transparency and want to share some of the basics here too.
The type of property will also be a huge factor. Buy to Let lenders like property that can easily be sold to anyone, i.e. property that is desirable to the widest demographic. High rise apartments, properties in ex-social housing areas, non-standard construction property and areas close to commercial can be problematic. Lenders do not want to have to hold property for long if they have to resort to repossession and so they certainly don’t want property that only a small niche would be interested in, cash buyers or even property only Buy to Let investors would be interested in because it reduces the likelihood of a quick sale. An average 3 bedroom semi is always going to be ok, but consider that if it’s a property you might not want to live in yourself, could it be problematic to mortgage?
The property must also be deemed lettable by the vast majority of lenders, and this means it must have power and water, be heated and have a functioning kitchen and bathroom as well as being generally habitable. Different lenders have a different tolerance to this, so if you are buying a property that needs a full refurbishment, check with one of our brokers which lenders would be suitable.
Below is a list of generally problematic, or uncertain property types that would warrant further investigation before committing to (Again, speak to one of our brokers, who can give you some specific advice, always free and with no obligation)
- Flats above shops
- Flats in blocks over 5 storeys
- Studio flats of less than 25 sq.
- Ex local authority housing, particularly flats.
- Non-standard construction.
One of the biggest changes that has occurred after the last recession has been the lenders requirements for applicant income. As a rule you need at least £25,000 per annum in gross income or net profit. Sometime this can be joint income, other times at least one applicant must meet this, but most lenders ignore income derived from property rental. The reason is very simple; lenders would like you to have a backup source of cash flow to cover periods where you might have higher than average void periods. If your income relies on property rent, that income will be linked and therefore not of any use.
There are some lenders that will allow applicants with no other income however, if there is some experience in letting already, typically 6 months or more.
One area that lenders and regulators are working hard to clamp down on, is where borrowers use a Buy to Let mortgage to purchase a property to live in themselves, because they don’t have the income required for a residential mortgage. Lenders have put some tough measures in place, and this is one reason you may find it difficult to get a Buy to Let if you have less than £25k income and don’t already own a residential property.
Many applicants are often surprised however, to find they can borrow money over a much longer period than they expected. Most lenders will lend to the age of 75, however a good few exceptions exist that can lend to age 85 or even 90 years old.
There has been a great deal of change in the market currently and new rules have made BTL a much tougher proposition. Firstly, EU rules introduced early 2015 now require a different approach to customers who buy with the express purpose of letting a property out and those who decide to convert an existing residential property to a BTL, often because selling is not preferential for several reasons. These “accidental landlords” are now called Consumer BTL and these mortgages are regulated. This means that lender that are not regulated by the FCA are not able to offer these mortgages, and that those that are regulated need to be more thorough in the way they assess them. Here at AALTO we can offer both types and can manage the different requirements of each.
In early 2016 another significant change was made in that the Prudential Regulation Authority started imposing restrictions on how much a lender could advance based on the rent. Typically, there were two factors to this calculation, the interest rate that was used to calculate the payment, usually higher than available as an initial term to allow for future rate rises, has been mandated at 5.5% unless longer 5 year terms are taken, and the buffer between monthly payment and rent, typically 125% has been increased to 145%. This means that loans that would have worked last year don’t fit, and customers are being forced to increase their deposit to compensate. This affects higher value property the most because of the disparity between rent and property value increases the more expensive a property. Rent tends to be more closely tied to people’s incomes, which have risen much more slowly than house prices, especially in London.
One way to mitigate this is by buying in a limited company, where the calculations are much less strict. More information can be found here
Your property may be repossessed if you do not keep up repayments on your mortgage.