Buy-to-lets are an attractive investment because they have the potential to provide additional monthly income while also representing a long-term commitment.
If you’re considering buying a buy-to-let property and becoming a landlord, then you’re in good company. Buy-to-let property purchases are on the increase, and house prices in the UK have been rising for years. There is currently a shortage of rental properties in the UK, and demand for them is high.
While buying to let can be lucrative, investing in property is a big financial commitment, and it’s important to know both the risks and the benefits before you begin searching for investment property for sale.
In this guide, we will explain the basics of how buy-to-let mortgages work and the advantages and risks involved with investing in one.
What is a buy-to-let property?
A buy-to-let is a property that the owner rents out to tenants to earn an income rather than living in it themselves.
Many people invest in buy-to-let properties to start earning an additional income on top of their day job, although some people manage multiple buy-to-let properties full-time.
Any property type can be a buy-to-let, from small city flats to large family homes.
Unless you have a big ol’ pile of cash saved up, you’re going to need a mortgage to finance your buy-to-let venture. If you plan to buy a property to rent, rather than applying for a standard residential mortgage, you’ll need to apply for a buy-to-let mortgage.
Can I live in my buy-to-let property?
No, buy-to-let properties require specialist buy-to-let mortgages. One of the conditions of a buy-to-let mortgage is that you rent the property out to tenants and do not live in it yourself. If you want to live on the property, you need to apply for a standard mortgage.
What are the differences between a residential mortgage and a buy-to-let mortgage?
Buy-to-let mortgages work a little differently from standard mortgages. Here’s a rundown of the key differences you should know before applying for one:
Interest-only – Most buy-to-let mortgages are interest-only mortgages. This means that you are only required to pay the interest on the mortgage each month, not repay any of the loans. At the end of the mortgage, you will need to either pay back the loan in full or re-mortgage. Many people pay off the loan using savings from the rental income they have earned by letting the property, or by selling it.
The amount you can borrow – When assessing how much to lend you, most lenders will consider the property’s potential rental income as well as your personal income.
Higher rates – Usually, buy-to-let mortgage rates are a little higher than standard residential mortgage rates because lenders deem them to be riskier.
Larger deposit – You will usually require a significantly larger deposit for a buy-to-let mortgage than you would for a standard residential mortgage. Most lenders require a deposit of between 20% and 25% of the property value.
Higher fees – Most lenders charge higher arrangement fees on buy-to-let mortgages. While you are usually charged a flat fee for taking out a standard mortgage, buy-to-let arrangement fees are usually charged at a percentage of the mortgage value.
Can anyone get a buy-to-let mortgage?
Taking out a buy-to-let mortgage can be more challenging than taking out a standard residential mortgage.
Lenders tend to view buy-to-let mortgages as riskier, so there can be more hoops to jump through, criteria to meet, and money to be paid to secure one.
The rules and criteria for getting a buy-to-let mortgage vary depending on which lender you choose and which property you wish to buy to let.
Common requirements for a buy-to-let mortgage include:
- A deposit of at least 25% of the property value
- A good credit history
- You must be under the lender’s age limit (usually 70-75 years old) when the mortgage ends
- You must earn enough to afford to invest in property (usually upwards of £25,000 p/a)
- Sometimes you may also need to be a homeowner (either owned outright or with a mortgage).
If you don’t meet all the criteria above, you may still be able to get a buy-to-let mortgage, depending on your circumstances. The best way to find out if you are eligible for one is to speak to a trusted mortgage advisor.
Can a first-time buyer buy to let?
While many lenders expect you to already own your own home before you apply for a buy-to-let mortgage, it may still be possible for first-time buyers to get a buy-to-let mortgage if they meet the lender’s criteria.
There are, however, some important things to know before you take the plunge as a first-time buyer.
No first-time buyer benefits. You won’t get the same first-time buyer benefits on a buy-to-let as you would on buying a home to live in yourself. Neither stamp duty nor first-time buyer’s relief is available on buy-to-let properties.
If you also want to buy a house to live in yourself. If you buy to let before buying your own home, it could make buying your own property a little tricker later down the line. This is because when assessing your suitability for a mortgage, lenders will take into account the debt you have outstanding on your buy-to-let mortgage. You would also need to pay the full buy-to-let surcharge if you buy another property when you already have a buy-to-let.
How to choose a buy-to-let mortgage
Just like a standard mortgage, buy-to-let mortgages are available in all different shapes and sizes, including fixed-rate, variable-rate, tracker, and discounted variable. The appropriate buy-to-let mortgage for you will depend on several different factors, including your financial situation, the size of the deposit you put down, the property that you are buying to let, and the property’s rental value.
What are the advantages of a buy-to-let?
According to an article published by the BuyAssociation, the appetite to invest in property in the UK is rising, with buy-to-let landlords more active with property purchases in the first quarter of 2022 than they have been since 2016.
Let’s find out a few key reasons why so many people are choosing to invest in property and become landlords now.
Rising house prices
Whilst buy-to-lets are by no means a foolproof investment, investing in property in the UK is a pretty safe bet as house prices have been rising reliably for a long time. You can maximise your return on investment by carefully researching which areas are most in-demand and the type of rental properties that people are looking for there.
Capital growth
Capital growth is the amount by which your property goes up in value during the time you own it. As UK house prices have been increasing for some time, the outlook for long-term capital growth on buy-to-lets currently looks good.
Extra income
The rental that you charge on your property should cover your mortgage interest payments by at least 125%, meaning that once you’ve covered your buy-to-let’s monthly mortgage payment, you should still have some additional profit leftover to do with as you please.
Potential to own a property at the end
Many people save the additional income that they earn from their buy-to-let to pay off the mortgage on the property. If you do this and the property also undergoes capital growth, you could gain a very valuable asset in the long term.
Opportunity to expand
Why stop at one buy-to-let? If your first venture into property letting is a success, you could save the profits from your first to invest in a deposit for another. Who knows, you may even end up with your own buy-to-let investment portfolio, investing in different property types in different locations.
High demand
As mortgage rates rise, so does the demand for rental properties. According to Rightmove, total tenant demand is up by 6% on last year, but available properties are down by a whopping 50%. There is currently a shortage of rental properties available in the UK, making competition for rental properties high and reducing the risk for those looking to break into the buy-to-let sector.
High rental value
As demand for rental properties soars, so do rental values, which are currently at their highest on record. According to Rightmove, in 2022, the national average asking rent has increased by 10.8% since last year.
Can provide passive income
Once you’ve found your property, got your mortgage, and welcomed your tenants, buy-to-let properties can quietly tick over in the background providing a passive income with little input from you for months on end. Of course, things won’t always be like that, you may experience other months where everything seems to be going wrong with the property, or your tenants are causing you a headache, so be prepared to take the rough with the smooth.
What are the disadvantages of a buy-to-let?
Buy-to-lets can be lucrative investments, but they’re not a guaranteed way to make money and do come with their challenges and risks.
If you’re planning on buying your first buy-to-let, it’s important to know the risks involved and make sure you’re going into the venture with your eyes wide open.
House prices could go down
While house prices have, generally, been rising for many years, they could go down, and then your buy-to-let could lose value.
Costs when the property is empty
It can be very difficult to keep a buy-to-let property occupied at all times, especially if a tenant leaves unexpectedly. You will need to have the financial means to pay the mortgage on your buy-to-let out of your own pocket during any periods where it is not occupied by tenants.
Property maintenance
Unless you invest in a property maintenance service, you will need to be on-call for your tenants 24/7 to maintain the buy-to-let property and carry out repairs.
Finding tenants
Finding tenants to fill a rental property can be very time-consuming unless you enlist the help of letting agents like our professional team here at Mistoria Estate Agents Liverpool.
If you decide to go it alone, you will need to make sure you are aware of all the relevant laws and regulations. At a minimum, you will need to advertise your property, arrange, and carry out property viewings, check references, use an appropriate deposit scheme, and fill out all relevant paperwork.
Extra stamp duty
If you already own another property, then when you buy a buy-to-let it counts as an ‘additional property’, and you will need to pay a stamp duty surcharge. This means that you are required to pay an extra 3% in stamp duty land tax (SDLT) on top of your usual stamp duty rate.
How much deposit do you need for a buy-to-let?
The deposit required for a buy-to-let mortgage is typically more than that for a standard mortgage.
According to Barclays, you usually require a deposit of 25% of the property’s value for a buy-to-let mortgage.
The amount you need to put down as a deposit can vary depending on the deal that you choose. Generally, you won’t find a buy-to-let mortgage that requires a deposit lower than 20% of the property’s value, but you could be required to pay a deposit of up to 40%.
Should I use a letting agent?
Whether or not you choose to use a letting agent is a personal choice and depends on how much time you have available to spend on the day-to-day running of your buy-to-let and how confident you are at doing it all yourself.
If you are a buy-to-let beginner with little or no experience in property investment, buy-to-let legislation, or acting as a landlord, then you may benefit from teaming up with a letting agent.
Many buy-to-let Liverpool landlords trust our team of experienced Liverpool letting agents to manage their investment property in Liverpool or buy-to-let properties in the UK for the following reasons:
- We will advertise your property – Providing you with more exposure to prospective tenants
- We will carry out viewings – Saving you time and inconvenience.
- We perform extensive reference checks – Ensuring we find the “right” tenants for your property.
- We offer an inventory service – Inventory video/photographic evidence to provide you with property protection.
- We provide business knowledge and expertise – A qualified team of accountants and marketing, advertising, and PR professionals.
- We provide a trusted and regulated service – We are members of the National Landlords Association (NLA) and are regulated by the Association of Residential Letting Agents (ARLA).
For further help or advice about buy-to-let properties in the UK, buy-to-let in Liverpool, or to find out more about our letting agent services, get in touch with our friendly and knowledgeable team here at Mistoria Estate Agents, by calling us on 0151 317 5383.
