Buy to let mortgages are harder to get than they used to be. It is definitely more difficult for landlords to make a profit now, not just because of COVID-19. However, investing in buy-to-let right now allows you to take advantage of lower mortgage costs with the chance of a better return than on a savings account. There is always the hope of building up capital in the property over the long term. Having a decent deposit is now essential to get the mortgage you need.
There are some basic requirements you’ll need to fulfil for all mortgage providers. They all have different criteria but they are more demanding than they used to be.
If you are tempted then you need to do some research or work with a mortgage broker experienced in this field. These are some of the questions you should be investigating and have answers to:
- Do you understand the risks involved in investing in buy-to-let?
- Can you afford to take those risks?
- Do you already own property (either outright or with a mortgage)?
- What is your annual salary (£25,000 is seen as a minimum by most lenders)?
- Are you interested in a residential property or commercial?
- Do you know your credit score?
- How old will you be when the mortgage term finishes?
- How big a deposit can you afford (some lenders demand up to 40%)?
What are the biggest buy to let risks?
It’s important to be aware of the risks before you take the plunge. The biggest risk is that your running costs exceed your net income.
Generous tax breaks have been taken away
As of April this year, landlords will be taxed on revenue rather than profits (no more tax relief on your mortgage interest). You will, however, get a 20% tax discount on mortgage finance costs. The 10% discount on tax bills for landlords of furnished buy-to-let properties to cover ‘wear and tear’ has also been removed. There’s now a stamp duty surcharge of 3% on buy-to-let properties costing over £40,000. So if your investment property costs £255,000, you’ll now get a stamp duty bill of £10,400.
Periods between tenants
You need to have enough cash in the bank to tide you over until you have a new tenant as you will have empty periods when nobody is paying the rent.
Repair and maintenance costs
There will be ongoing maintenance costs so you will need the funds available for that. If you have a property with an old boiler you need to have funds ready for a replacement.
Troublesome tenants
You could have difficulty collecting the rent or have a tenant who does a lot of damage or refuses to leave. You will need a good landlord’s insurance policy which includes legal costs.
Health & safety requirements
Don’t forget annual portable appliance testing (PAT) on electrical appliances. If the property uses gas, you must have a gas safety check done every year by a Gas Safe registered engineer.
Next Steps for budding buy to let landlords?
So you think you have the qualifications for getting a buy-to-let mortgage and can afford the risks. What is the next logical step?
1. Do your property research
Decide whether you want to rent to professionals, families or students. Look for locations with relatively low property prices and strong rental demand, including university towns. Aim for at least a 7% return.
2. Search for the best buy-to-let mortgage deals
The easiest way to do this is with a whole of the market mortgage broker as they often have access to information that is hard to find on your own.
3. Check your personal finances
Check that the current mortgage on your home is still the best option for you; your mortgage broker can help with that.
Buy to let Moneyfacts Data (April 2020)
Data from independent mortgage monitor Moneyfacts shows that there’s been a big drop in the choice of mortgage for buy to let landlords. Product choice for borrowers at 80 per cent Loan To Value has plummeted on both two- and five-year fixed deals. There there are fewer than 40 deals combined today in these sectors and interest rates have subsequently risen.
“It’s clear as day to see how the virus pandemic and isolation rules have led to a huge shake-up in the choice and cost of buy to let mortgages. This couldn’t come at a worse time, as from this new tax year, mortgage interest tax relief has been completely phased out for buy to let landlords” explains Rachel Springall, Finance Expert at Moneyfacts.
“The fall in choice and rise in interest rates will be a blow to landlords who are considering investing, however the market has moved in this way to protect providers’ existing books. Even if some believe the property market to be ripe to invest in, prospective borrowers who don’t have a decent deposit could well be discouraged” Springall continues.
“Existing customers could well be looking to cut down their monthly loan payments or indeed are concerned about rental payments. Thankfully, lenders will allow borrowers to defer their mortgage repayments for three months as of last month, but landlords must act now and check online to see how tenants falling onto universal credit or local housing allowance could impact their rental cover ratio. As interest rates rise, landlords would be wise to move quickly to remortgage.”
The situation is evolving faster than normal due to the knock-on effect the Covid-19 lockdown measures. However, when the dust settles landlords will find themselves in new territory due to long term changes to the regulatory environment.
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The effects of tax and regulation on the buy to let market.
https://www.themortgagebureau.co.uk/buy-to-let-mortgage/buy-to-let-mortgages-new-territory/
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