Many people have found that buying to let can be an attractive way to use their money and provide some extra income. However, there are important questions to consider when deciding if it’s right for you.
If you’re unable to buy the property outright, you’ll need to apply for a mortgage.
Lenders have their own criteria when it comes to buy-to-let mortgages. For example, to be eligible for a buy-to-let mortgage with HSBC:
you need to have a minimum annual salary of £25,000
you must have owned and lived in your existing property for at least 6 months
the property must be in the UK
Additional criteria apply.
Deposits for buy-to-let properties are higher than they are for residential properties.
While most mortgage lenders require a deposit of at least 25% of the property purchase price, some lenders require as much as 40%.
Many buy-to-let mortgages are taken out on an interest-only basis.
This means your monthly payment only covers the interest charged on your loan, so the amount you owe doesn’t reduce over time.
Rental income may help cover your monthly mortgage payments, however, you’ll need to be able to repay your mortgage at the end of the mortgage term.
Alternatively, you may decide to take out a buy-to-let mortgage on a capital repayment basis.
With this option, your monthly payments cover the interest charged on your loan each month, as well as a repayment of some of the capital. This means that your mortgage will be fully paid off at the end of the mortgage term if you keep up with the monthly payments.
Interest rates and mortgage fees tend to be higher for buy-to-let mortgages than for residential mortgages.
You’ll also need to continue to make your monthly payments during ‘voids’. Voids are periods when the property is empty because you can’t find a tenant, or you need to carry out maintenance.
Mortgage lenders will take these factors into account when deciding whether to lend to you.
There are other costs to consider when buying a property to let, such as:
As a landlord, you will have legal obligations and a duty of care to your tenants, so it’s really important to understand these before investing in property.
It’s important to research the rental market in the area you want to buy in. It can give you an idea of local demand, who your tenants might be, and how much you could receive in rent – and therefore the potential yield on your investment.
Understanding the market can help you when it comes to finding tenants, and managing your income. There may be times when your property is empty. So you need to make sure you can manage without this income during these times.
If your property increases in value, you may be able to sell the property for more than you paid for it. However, property prices can fall as well as rise, meaning it could also drop in value.
You’ll need to pay tax on income you earn from your investment property, and on any profit you make when you sell your rental property. However, you may be eligible for certain tax reliefs. Always seek tax advice as tax rules can change, and will depend on individual circumstances.
Your property may be repossessed if you don’t keep up repayments on your mortgage.