What is a Buy to Let property/mortgage?

In 1996 the Association of Residential Letting Agents, ARLA, created with several leading mortgage lenders the Buy to Let initiative.

Prior to the Buy to Let initiative investors in residential property were paying larger surcharges on their mortgages or were being forced to borrow at commercial rates. Potential rental income was not been taken into account for servicing the mortgages that they were taking on these properties.

The lenders supporting the Buy to Let initiative have brought their interest rates into line with the rates for owner occupation and take rental income into account for servicing the loan.

How do Buy to Let mortgages differ from residential mortgages?

You will have to pay a larger deposit. Normally, you have to pay at least 20% of the property value as a deposit for a Buy to Let mortgage, although some lenders charge as little as 15%. (Often if the deposit is low the interest rate will be higher).

Buy to Let mortgage rates are generally not quite as competitive as other mortgages, costing you a little extra in interest each year. Lenders see buy to let mortgages as more risky than other types because you must rely on tenants to pay their rent. Higher rates are a form of compensation against these risks.

The amount of money you can borrow will probably be calculated differently. The most common calculation is based on expected rental income, in many cases the rental income must be equal to or greater than 130% of the mortgage payments. Some lenders will only take into account rental income with no salary, whilst others may need evidence of your earnings to show that you won't need to depend on rental income alone.

What type of property should I invest in?

If you are investing for growth, the best investment tends to be properties within affluent areas and let out to professionals or families. The rental income is not that great compared to the property value, however, the growth potential is excellent due to the high demand for properties in these areas.

If you are investing for income, the best investment tends to be multi-let properties. This usually means that the property is let to several individuals to boost the rental income. Students are the favoured type of tenant when looking to maximise income.

Will I need to use a professional Letting Agent?

Many lenders recommend (some will insist) that you use a letting agent who is a member of 'The Association of Residential Letting Agents' (ARLA). You will pay about 15% of your gross rental income to a letting agent to manage your property. For this you can expect to find an experienced agent who will know the local market and will help you to find suitable tenants, draw up tenancy agreements, collect rent and notify your lender when your tenants change.

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What are the tax implications of Buy to Let mortgages?

You will be charged tax against the net income you receive from rents, however deductions may be claimed for the costs of maintenance, such as insurance, mortgage interest, agent's commission and other reasonable management expenses (but not improvements). A wear and tear allowance of 10% of the rents received may also be deductible if the property is furnished. Because the property isn't your primary residence you could be charged capital gains tax when you re-sell it, if it has increased in value. You may receive some gains relief, which will be determined by the length of time you have owned the property.

What else should I think about?

Lenders may impose a maximum number of Buy to Let properties and there will normally also be a total maximum loan.

Different lenders have different lending criteria, some may accept Department for Work and Pensions (formerly the DSS) tenants and students, others may accept neither.

Don't forget to include upkeep of the property and tenant-free periods when you work out your budget.

How can 1st Buy to Let mortgages help me?

We offer a number of quotes, from specialist property lenders (most of whom specialise in the buy to let mortgage sector) and you can choose to select the one that suits you best. If you aren't sure we can put you in touch with brokers who specialise with new landlords as well as those with large portfolios. We can offer you information, enabling you to determine what is best for your buy to let needs.

Our quoting system can save you a lot of time, we have lots of information on our network of buy to let sites as well as providing you with useful online quotes sourced from a number of lenders, helping you make the decision about whether you want to enter, entrench yourself in the buy to let market.

The landlord sector is different in different parts of the UK. 2003 saw a number of landlords purchase property in Manchester and other towns outside the South East because the market in London was saturated. The south east market will change again in 2004 and the demands of different types of tenant will change the market in each of these areas. No matter where you are buying we can provide useful quotes with our online system.

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