Buy to Let Mortgages

Business Buy to Let Mortgages

Most Buy to Let mortgages are not regulated by the Financial Conduct Authority (FCA).

These types of mortgages are designed for property investors and private landlords, who do not intend to live in the purchased property and are referred to as Business Buy to Let’s.

Buying additional property for the purpose of letting it to earn rental income can be risky and complicated since there is no guarantee that house prices will rise nor that rental income will be uninterrupted.

That said, letting a second property to tenants could return reasonable financial rewards, but it’s important to properly consider the risks, as well as rewards, first.

When buying a rental property, you will need to decide whether your objective is income or capital growth. Are you looking to cover the monthly costs and perhaps make a profit to supplement your income? Or, are you looking to make a profit later upon the sale of the property, with the assumption your property’s value will increase in value over time? The decision may affect the type of property you purchase, its location, and also the risk involved since there is no guarantee that property prices will rise.

If you can’t buy the property outright you will need to consider a Buy to Let mortgage. When it comes to this type of mortgage there are several differences to be aware of.

Normally a lender’s decision about whether to offer a mortgage or not, will be based on the rental potential of the property as well as your own income, though in some cases, your income may not be considered at all. Additionally, as of the beginning of the 2016 tax year, Buy to Let purchases now attract an additional 3% Stamp Duty Land Tax levy.

Usually, a minimum of 20% to 30% of the property’s value is required as deposit, which is often higher than the desposit required for other types of mortgage, and you can expect Buy to Let mortgages to have higher interest rates applicable to them.

As well as mortgage costs, potential landlords should carefully consider the costs of owning the rental property itself. These additional costs may include:

            • Property Maintenance. The upkeep of the property itself, such as repairs to appliances, and redecoration that may be required before a property can be let to new tenants.
            • Letting Agent fees. Though it varies, letting agents normally charge around 10% of the monthly rental income for managing tenants. If you need full management of your property, it is not unusual for these costs to be much higher, typically around 15% of monthly rent.
            • Ground Rent/Service Charges. These costs only apply to leasehold properties.
            • Legal insurance. A wise precaution in the event that you need to evict tenants, say for example in the event of non-payment of rent, anti-social behaviour or damage to the property. Legal insurance is intended to cover costs involved in pursuing eviction.
            • Buildings /Contents Insurance. The property will need buildings insurance, and any furnishings provided as part of the rental agreement will also need to be insured with a suitable contents insurance policy.
            • Furnishings. If the property is to be let as furnished then you’ll need to consider the initial cost of providing the items needed to furnish the property.
            • Appliance Safety and Inspection. Certain appliances will need to be regularly inspected and serviced to ensure they are safe to use and compliant with current regulations. Examples include Gas Boilers and Gas Fires.

When choosing a letting agent to act on your behalf, it is wise to choose one that is a member of The Association of Residential Letting Agents (ARLA). All members of the ARLA participate in a bonding scheme to protect both rental income and tenants’ deposits.

You can visit the ARLA website at www.arla.co.uk.

Consumer Buy to Let Mortgages

Consumer Buy to Let mortgages are regulated by the Financial Conduct Authority (FCA).

There are some situations where borrowers do not seem to be acting in a business capacity. Examples of this may be where the property has been inherited or where a borrower has previously lived in a property, but is unable to sell it so resorts to a Buy to Let arrangement.

In these cases, the borrower is a landlord as a result of circumstance rather than through their own active business decision. The government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework.

In practice, a Consumer Buy to Let transaction will be treated in a similar way to a residential mortgage, so more paperwork and stricter affordability tests, meaning affordability will no longer be based solely upon the rental coverage.

If you think you could fall into this category and want to know more about what this means for you – please contact us to discuss.

Usually, a minimum of 20% to 30% of the property’s value is required as deposit, which is often higher than the desposit required for other types of mortgage, and you can expect Buy to Let mortgages to have higher interest rates applicable to them.

As well as mortgage costs, potential landlords should carefully consider the costs of owning the rental property itself. These additional costs may include:

            • Property Maintenance. The upkeep of the property itself, such as repairs to appliances, and redecoration that may be required before a property can be let to new tenants.
            • Letting Agent fees. Though it varies, letting agents normally charge around 10% of the monthly rental income for managing tenants. If you need full management of your property, it is not unusual for these costs to be much higher, typically around 15% of monthly rent.
            • Ground Rent/Service Charges. These costs only apply to leasehold properties.
            • Legal insurance. A wise precaution in the event that you need to evict tenants, say for example in the event of non-payment of rent, anti-social behaviour or damage to the property. Legal insurance is intended to cover costs involved in pursuing eviction.
            • Buildings /Contents Insurance. The property will need buildings insurance, and any furnishings provided as part of the rental agreement will also need to be insured with a suitable contents insurance policy.
            • Furnishings. If the property is to be let as furnished then you’ll need to consider the initial cost of providing the items needed to furnish the property.
            • Appliance Safety and Inspection. Certain appliances will need to be regularly inspected and serviced to ensure they are safe to use and compliant with current regulations. Examples include Gas Boilers and Gas Fires.

When choosing a letting agent to act on your behalf, it is wise to choose one that is a member of The Association of Residential Letting Agents (ARLA). All members of the ARLA participate in a bonding scheme to protect both rental income and tenants’ deposits.

You can visit the ARLA website at www.arla.co.uk.