First Time Landlords

More and more of us are becoming landlords, attracted by the potential for solid regular income and potentially strong capital growth.

The volatile state of global stockmarkets since 2000, coupled with the national obsession with bricks and mortar, has meant that buy to let has been one of the UK mortgage market’s biggest growth sectors in recent years.

This strong demand has resulted in intense competition among lenders, the result being that buy-to-let mortgage rates are now far more in line with ‘owner occupier’ residential terms.

Competitive interest rates and higher loan to value (LTV) ratios are now part and parcel of the buy-to-let loan.

If you’re considering becoming a landlord for the first time, below we’ve outlined some of the key things you need to bear in mind. For further information and to arrange a mortgage on your first buy-to-let property, call one of our consultants on 0845 330 0809.

Outline your goals
The way you finance your buy-to-let property depends, first and foremost, on your goals. For example, whereas some investors buy residential property to produce an income today, others do so to produce an income in the future.

People in the first category might opt for an interest-only mortgage in order to maximise the difference between the monthly payments and the rental income. They will also tend to buy higher yielding property such as ex-local authority houses and flats.

However, investors seeking an income from an investment property further down the line — usually to fund their retirement — will opt for a capital and interest repayment mortgage.

This way, they can feed the rental income into the loan with a view to reducing the capital balance as quickly as possible, and therefore clear the debt. The result is an ‘unencumbered’ asset to do with as they wish.

Lending criteria
These days, most lenders require a deposit of around 15% on buy-to-let mortgages. As well as imposing a monetary cap, lenders will also differ greatly in their overall selection criteria.

One lender, for example, will focus predominantly on the property itself, whereas another will make an assessment of not only the potential rental income of the property but also the borrower’s ‘primary’ status.

For example, it may want to see that the investor earns a minimum of £20,000 per annum from his/her primary occupation and also that the rental income from the investment property will cover the mortgage payments by 130%.

The rental proposition
Lenders need to satisfy themselves that a property is a good rental proposition before they make a mortgage offer. With this in mind, you need to do your homework to ensure that your chosen property is in an area where rental demand is strong in general, and for the kind of property you wish to buy in particular.

But who determines what the likely rental income will be? Lenders fall into two categories on this front: those that ask an independent lettings agent to confirm the anticipated monthly rental income and overall capital value of a property, and those that will turn to their own ‘panel valuer’. The latter, as a rule, tend to be more conservative in their estimations.

Maximising returns
The yields on buy-to-let properties can vary enormously. Landlords who purchased when house prices were rock bottom may now be enjoying yields, after expenses, of 9%–10% on their original outlay. But for those who bought when property prices were relatively high, yields will, by necessity, be lower.

However, investors should bear in mind that the return isn’t simply the income you earn but also the capital gain you make when you come to sell.

As a rule, higher yielding properties, such as ex-local authority flats, offer less scope for capital growth, whereas lower yielding properties — period apartments, for example — shower far greater capital appreciation.

To maximise your return, be sure to seek proper advice as to the costs you can set against tax on the rental income. These can include: mortgage interest, insurance premiums, cleaning and gardening fees, letting agent’s commission and, if the property is let furnished, a 10% wear and tear allowance.

However, the cost of initially furnishing the property and any measure to improve, rather than maintain, the property cannot be included. It’s important to file all paperwork relating to the cost of upkeep, as the Inland Revenue may ask for this to check against the information you provide in your self-assessment tax return.

Gearing up your yield
Borrowing the capital to fund the property purchase will help to enhance your yield. For example, if you buy a £100,000 property and receive rental income, after costs, of £6,000 a year, then your yield is 6%.

But take out a 75% mortgage, requiring you to commit just £25,000 initially and your yield on capital rises to 24%, less the additional cost of mortgage interest.

In periods of low interest, such returns can be compelling, but always bear in mind that if interest rates rise and your mortgage costs increase, your yield will fall.

You can, of course, manage this risk by opting for a fixed interest rate rather than a variable interest rate.