Buy to let mortgages

Buy to Let is the initiative devised by the Association of Residential Letting Agents and supported by leading mortgage lenders in the UK.

It is designed to stimulate the growth of the private rented sector by encouraging private investors to take the opportunities given by low, highly competitive, interest rates and the reasonable certainty of sustained capital growth over the coming years.

A better choice of buy to let mortgages

Investing in property has boomed in popularity in recent years and with good reason. Returns are looking attractive compared to the stock market, and property values have continued to rise. In fact, average property prices went up by around 25 per cent in 2002. That rate was simply unsustainable and we anticipate either no growth at all or a slight drop in prices this year. Property will continue to increase in value in the long term eventually making it a good medium to long term investment.

Most people (though not all) who wish to buy a property to rent out will have a mortgage on their own residence. So most will not be total novices in the world of mortgages. However there are some differences between a regular mortgage and a Buy to Let mortgage that your advisor can explain to you.

Low interest rates and a high demand for rented property, particularly from young professionals, make buying property to let an attractive proposition, and not just for the professional landlords. We will take you through the whole process step by step, look at who this type of investment is suitable for and ways to make the most of your money. In today’s property market, more and more private individuals are realising the benefits of buying additional property as a business venture. On average you can borrow 3.25 times your salary plus 6.5 times the annual rental income with just a 15% deposit.

The best buy to let mortgage rates in the UK

In the not too distant past anyone hoping to buy a property with the sole intention of letting it out was forced to opt for an expensive commercial mortgage. However, with the continuing boom in the housing market more and more high street mortgage lenders now offer a variety specialist buy to let mortgages.

In the summer of 2003 the UK buy to let mortgage market was estimated to be worth more than £40 billion, as more and more people wanted to take the next step up the property ladder. In 2006 the market was worth over £73 billion - an increase of over 180% in just 3 years.

There are now dozens of lenders offering a range of deals that now include discounted, fixed, variable, tracker, flexible and even self certification mortgages, helping to make buy to let an investment that is accessible to a broader section of the population. And with buy to let mortgage rates starting from just 4.99%, it's cheaper than you might have first imagined.

Why buy to let?

Property is an excellent long-term investment, with the potential to offer good income and good growth. Capital growth in property in the past 25 years has exceeded just about any other field, particularly in the south east of the UK.

Although this cannot be taken as an absolute indication of the future of the property market, which is highly unlikely to continue to rise so dramatically, property values are still on the increase in most areas.

However, fluctuations in the market and the delays inevitable in selling a property make it an unsuitable choice for anyone needing short-term returns, or who might need to access the money tied up in a house quickly.

Many people invest in a buy to let property as a pension - the rent each month can be used to supplement your retirement income, or the property can be sold and the proceeds used as a nest-egg.

One of the key things to remember is that buy to let should not been seen as a short term option, but if you research, plan and manage your investment correctly, you should end up making a profit in the medium to long term. It is not without its risks and involves considerable initial and ongoing costs including lettings agent commission, management fees, tax, insurance, legal cover, maintenance and repairs, service charges, and ground rent.

Choosing a property for buy to let

Location, type and state of the property are the three most important factors to look at - good research is vital. Is the property close to transport links? Is there parking? Is it close to amenities, such as the shops and leisure facilities? Don't just be guided by your own preferences – ask a local agent for advice on what's in demand in the area. In some places family homes are in demand, but in others a one-bedroom flat may be more easily let.

Most tenants have high standards these days - modern bathrooms and fitted kitchens are essential. There is a demand for unfurnished property, but showers, fridges and washing machines are now expected as standard. It is worth paying extra for a property in good condition, unless you have the time and resources to refurbish it.

You might choose a fantastic location for your immaculate property but still be unable to let it due to unfavourable market conditions, or just lack of demand. To cover your mortgage payments and make buying to let a successful investment you need to keep your property rented as consistently as possible. Make sure your research covers local demand for rental properties and an assessment of future demand, to be as certain as possible that you will be able to let your property.

The Association of Residential Letting Agents (check out their website at http://www.arla.co.uk) produces a booklet giving you tips on what to look out for when choosing a buy to let property. Their site also has guidance and advice for both first time and experienced landlords.

What will it cost?

Mortgage rates are not the same as in the residential market – lenders consider buy to let a greater risk and demand a greater return, so their buy to let rates can be up to one percentage point higher than residential rates. The deposit required is also higher. Most lenders ask for at least 15% of the value of the property, and this can rise to 50% on properties valued at £1 million or over.

If you arrange your mortgage through a broker other than ourselves, you may have to pay around 1% of your mortgage value in broker fees.

You will also have to pay for the survey and legal fees, as with any property purchase.

There may also be service charges to consider in a leasehold property. If you plan to let furnished, you will have to allow for the cost of buying reasonable quality basics – strict fire regulations prevent you using cheap second-hand furniture.

If you plan to use a letting agent, you will have to factor in that cost as well – fees can be between 15 and 20% of the rent.

Don't forget to add on the cost of insurance – not just for buildings and contents, but also against loss of rental income if the property stands empty, possible damage by tenants or for legal fees if you need to evict a tenant.

Any rise in the value of a rental property, unlike your home, is liable for capital gains tax. Each individual is allowed £7,500 income tax free per annum - £15,000 if you are married (you should check these allowances as they change each year). This constitutes your total Capital Gains Tax allowance for the tax year and assumes that you have not used up the allowance on other capital gains.

However, you will be able to set some of the maintenance and running costs off against tax. Mortgage interest payments, for example, can be set against rental income.

What are the risks involved with a Buy to Let?

As with all investments, the value of a property can go down as well as up - and unforeseen structural problems prove expensive. However, if you pick the right area and are realistic about returns, you can reduce the risks.

Rental income too can vary; if the market is saturated with rental properties, your annual income may remain static or even fall. You need to build leeway into the rent to allow for periods when the property might be empty between lets (it takes on average four weeks to let a property), and to cover maintenance costs.

The more cautious investor might prefer to borrow less - you should aim for a rental income of between 1.3 and 1.5 times the monthly mortgage payments.

Many people are put off buying to let by the thought that they will have to spend a lot of time sorting out problems such as broken washing machines or tenants who default on payments. A good agent can take care of everything, from finding tenants and checking references to managing an inventory and dealing with unexpected problems like burst pipes.

Agents can also advise on tenancy agreements. Most lenders require you to have a six-month, assured shorthold tenancy agreement with your tenants. You may also find it more difficult to arrange finance if you are planning on letting to students or for more irregular tenancy periods, such as “holiday lets” or “company lets”. You may also have difficulties should you be planning on letting to a DSS tenant.

Buying to let as part of your investment portfolio

A buy to let property can work well as a component of your investment portfolio. As a long-term investment, it’s important to balance your buy to let property carefully against your other investments – both short and long-term.

Whether you will receive both an income and a final lump sum from your investment depends on the size of your initial deposit and the level of your mortgage payments. If the market is over-supplied or mortgage rates rise, you could even find yourself having to take a loss on your property – hence the importance of a longer term view.

If you already have an extensive investment portfolio, it is often best to speak to an independent advisor about how a buy to let property might fit into this portfolio. If you’ve already invested in a buy to let property as part of your investment strategy, the advisor can also check that you are paying a competitive rate of interest. With fluctuations in the Bank Base Rate you could be paying more than you should – and your rents could be too high as a result, making your property less appealing to potential tenants.

The key point to remember is that buy to let is a long-term investment – you shouldn’t get into property investment looking for short-term gain.

Buy to let booklets available

The Department of the Environment publish a booklet titled 'Tenancies, a guide for landlords' which is available free by phoning 0870 122 6236.

The Council of Mortgage Lenders publish two booklets, which can be downloaded from their website www.cml.org.uk

Buying to let (leaflet) (PDF 50kb) - A guide for people thinking about buying a property to rent out.

Thinking of buying a residential property to let? (leaflet) (PDF 153kb) - A checklist of questions to answer before becoming a landlord.

These documents are in PDF format. You can open these files using 'Acrobat Reader'. If you do not have this utility installed you can get a free download from www.adobe.com

Remortgaging your buy to let property

By remortgaging a buy to let property you are likely to get a much better deal, especially if you took out your mortgage before 1996. Prior to this date buy to let mortgages didn't exist and borrowers had to rely on comparatively expensive commercial mortgages. Remortgaging also allows you to free up capital that could be used to put down as a deposit on another property.

Landlords are often put off remortgaging a property because they think that the ‘hassle' involved outweighs the benefits. The financial benefits are very real and you'll find that we go out of our way to make the process as painless as possible.

Remortgaging isn’t nearly as much hassle as most people think – particularly if you use our simple online enquiry form. Then one of our dedicated mortgage advisors looks after your remortgage for you – making it all less effort than you first imagined!

The best advice for you

If you have just started looking for a new buy to let property, you may have discovered that your estate agent claims to be a mortgage broker. Bear in mind that an estate agent has an interest in getting the mortgage arranged as quickly as possible, so that the deal can go ahead. This may not mean you are advised to take the best product, and many estate agents are also likely to recommend the products that give them the highest commission.

You should also bear in mind that as mortgage brokers, we specialise in buy-to-let deals, and can offer you excellent and impartial advice on this topic due to our experience. If you make a business out of being a landlord, we can likely help your business make more money.

How can I get a free Buy to Let mortgage quote?

To get your free buy to let mortgage quotes, you just need to enter some basic information into one of our simple online quote forms and your dedicated adviser will search the entire marketplace to find you the best mortgage deals available.

Or, if you prefer, you can call a fully trained adviser on 0800 169 4984. It will only take a few minutes of your time today but could save you thousands of pounds in interest payments, and will eliminate any worries you may have about getting the best deal possible.