Before you buy-to-let
Buy to let: a step-by-step guide
Buy-to-let property can be a great way to save and invest for the future, but it’s important you go into it with your eyes open. When house prices are rising and you have good tenants, buy-to-let property investment seems like easy money. But there are plenty of risks to prepare for too. Take your buy-to-let investment plans stage by stage to manage the balance between risk and return.
1. Start thinking about your mortgage options
Once you’ve found a potential investment property, you’ll need to secure the finance necessary to buy it. Getting the best possible deal on your mortgage is a crucial part of maximising the return on a buy-to-let investment. You’ll need a mortgage specifically designed for buy-to-let – you must tell lenders if you intend to rent out the property you’re borrowing against – and these products operate differently to conventional mortgages for the purchase of a residential home.
2. Make sure you’ve got the right deposit
Lenders generally expect borrowers to put down larger deposits on buy-to-let mortgages – you will find it difficult to get away with a deposit of less than 25% of the purchase price and for the best deals, you’ll need as much as 40%.
3. Check the rent will cover the repayments
The key lending criteria applied by most lenders is not necessarily how much you earn, as with a residential mortgage, but how much rent you’ll be able to charge. Lenders will look for a potential monthly rental income of at least 125% of your monthly mortgage interest payments.
4. Look for the best deals
In general, buy-to-let mortgages are more expensive than standard residential loans. Lenders argue that they are more risky products and that they therefore need to charge more. Expect to pay 1 to 2 percentage points more than you would for a residential mortgage – charges such as arrangement fees may be higher too. Taking advice (see below) will help you find the most competitively priced mortgage.
5. Calculate the potential return
You’ll often hear buy-to-let investors talk about the rental yield on their properties (or property portfolios). It’s an important figure and it’s simple to calculate – the yield is simply the annual rent you’re earning on the property divided by its value, expressed as a percentage. So a house worth £300,000, on which the annual rent is £24,000 (£2,000 a month) would be yielding 8%.
6. But don’t forget about costs
However, this is a gross yield, meaning a yield calculated before costs. Out of that rent, you’ll have to make mortgage repayments, pay letting agents fees, cover buildings insurance premiums and find money for maintenance. Let’s assume those costs come to £1,200 a month, leaving you £800 of profit. That reduces the net yield to a little below 3% a year. And remember that you will probably need to pay income tax on this money too.
The example shows just how important it is to do your sums before embarking on a buy-to-let property investment. You’ll want to be sure you can earn enough rent to make the investment worthwhile – and you’ll need to factor in safety margins for emergencies such as a very large unexpected bill or a period when you don’t have a tenant (or when a tenant doesn’t pay the rent). The mortgage is the largest cost for most buy-to-let investors, but don’t forget about other bills too.
Take independent advice
Buy-to-let investors have the same mortgage options as other borrowers – whether to go for a fixed or discounted variable rate deal, for example. It’s also just as important that they identify the best possible deals. In practice, the best way to pick the right product and find the best value is with the help of an independent mortgage adviser with specialist knowledge of the buy-to-let market.
Our expert mortgage advisers will search thousands of mortgage deals made available to us and pick out the one that’s right for your circumstances. They’re paid a salary – not a sales commission – so you can have confidence that you’ll receive truly impartial advice.