Buy to let – Head or Heart?Posted on: 31 May 2013 by Ronan Marrion
Ronan Marrion explains what to look out for when considering a buy to let investment
The buy-to-let market burst into life in the first quarter of the year when lending to landlords jumped despite efforts by the government to bolster loans to first-time buyers. (1) With historically low interest rates and demand for rental properties driving rents upwards the opportunity for anyone with spare cash to invest makes Buy to Let a very attractive proposition.
The Council of Mortgage Lenders said its members gave landlords 33,500 mortgages worth £4.2bn in the first three months of 2013, compared with lending of £3.7bn in the same period of 2012, an increase of £500m. The proportion of the mortgage market taken by buy-to-let (BTL) deals rose to 13.4% of total outstanding lending, up from 12.9% at the end of the first quarter of 2012 and 13% in the last quarter of last year. The council said there are 1.46m BTL loans in the UK – triple the number that there was a decade ago. (1)
Rental income levels will dictate if your Buy to let property is a good investment and according to research by Sequence (a national chain of estate agents), the spike in buy-to-let lending is bringing rents under control after previous sharp rises. Average monthly rents in April were unchanged from March at £704 and down 0.52pc on last year. In London, the most expensive region, the average was also unchanged at £1,376. (2)
When looking for a Buy to let mortgage landlords typically need a deposit of at least 25 per cent and they will also be required to have a rental income of at least 125 per cent of monthly mortgage payments. In other words, if the mortgage cost is £1000, the rent must be £1,250. (3)
Buy to let tips
So the market appears right but if you are considering Buy to Let then keep the following in mind when calculating if this is for you:
- Try and select your Buy to Let property with your ‘head’ and not your ‘heart’. It is an investment and less ‘pretty’ and cheaper properties may offer higher rental yields especially if located near to local amenities, schools or transport links.
- DO the ‘financials’. Is your money better off in another investment? What if interest rates rise? If they do they will eat into your profit and you may struggle.
- Will you be satisfied with rental income as your main or only return? House prices could show no or negative growth? Lenders increasingly add upfront fees to landlord deals, which can outweigh the benefit of lower interest rates so at the outset having the assistance of a mortgage specialist with buy to let experience can help ensure you arrange with the best lender.
- If your mortgage is on an interest-only basis have you considered how you expect to pay off the capital owing in the future?
- Tax is another issue. How will your tax position change due to the income from your rents
- Consider other costs such as those of agents. If you are working full time in another occupation using the services of an agent might prove essential. Expect to pay around ten per cent of the rental income – and factor this into your forecasted returns.
- Will I always have a tenant? If the property is empty for 2 months in the year this will leave a large hole in your budget.
- Will my tenant be a good one? If a tenant decides not to pay there is a process for getting them out. It’s not quick and it could cost you. It may be a 3-month process (2 month notice and one month cleanup)
There are many other factors that should be taken into consideration and this is where the expert help of a Mortgage broker with experience of the Buy to Let sector can help.
Ronan Marrion Mortgage specialist with Worldwide Financial Planning says:
“Over the past 2 years we have seen significant growth in Buy to Let applications. Rental yields are looking particularly strong at present when compared with traditional savings rates and in the UK people really seem comfortable with their money in 'bricks and mortar' as it may seem more tangible than money invested into stocks and shares for example.”
Your home may be repossessed if you do not keep up repayments on your mortgage.
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