Consider all the costs involved with your mortgage

Consider all the costs involved

It’s important to keep your eyes open for the potential costs of purchasing a property for buy-to-let usage, so we’ve highlighted a few points to consider (but is not limited to):

Arrangement fee

Product fees apply on some mortgages, and these can be larger than those found on standard residential mortgages, and are either required to be paid up front, or can be tagged onto the cost of your mortgage. Watch out for additional administration charges made by lenders for arranging the credit on your mortgage.

Stamp Duty

If the property you’re investing in is over a certain price, you’ll have to pay a lump-sum tax known as Stamp Duty Land Tax (SDLT) in England and Northern Ireland, Land Transaction Tax (LTT) in Wales, or Land Building Transaction Tax (LBTT) in Scotland. The price you’ll pay will vary on the amount you paid for the property. This price will also vary depending on whether you already own a property in the UK. The below rates are different to the standard Stamp Duty rates for residential properties, as you have to pay a 3% surcharge in addition to the standard Stamp Duty rate.

•         A property under £125,000 - you pay 3% Stamp Duty

•         A property between £125,001 and £250,000 - you pay 5% Stamp Duty

•         A property between £250,001 and £925,000 - you pay 8% Stamp Duty (Information correct as of March 2022) (Please see the official government site for more accurate / up to date information).

(Please note – we do not provide tax / legal advice in this area. Please seek specialist advice.)

Legal fee

Solicitors fees must be budgeted for, typically incurred for handling the contracts, documentation and the range of searches undertaken. (Please note – we do not provide tax / legal advice in this area. Please seek specialist advice.)

Valuation

Many lenders will wish to carry out a mortgage valuation which you may have to pay for. However, you can look to upgrade to a structural survey or a homebuyers survey report for an additional cost, if you wish.

Insurance

It’s vital to take out adequate insurance on your property, starting out with Buildings Insurance as a minimum, and Contents Insurance to cover the furnishings within. You would require a dedicated landlord’s policy, different from standard residential cover. When it comes to insurance, you do not need to cover for any of the tenant’s belongings, it is their responsibility to be insured separately.

There are some specialised landlord’s protection polices available, such as rent insurance or covering legal expenses for evicting tenants, for example, so it is worth speaking to us about insurance and protection options available at the same time as discussing your mortgage.

Here are some of the types of insurance you may wish to consider, and what they do (please note this list is not exhaustive list and others may be applicable):

• Landlord building insurance – protects against risks to the building that may result in replacement or repair work, e.g. subsidence, fire, burst pipework.

• Landlord contents insurance – covers against fixtures and fittings supplied, such as white goods and carpets.

• Portfolio insurance – ideal if you own five or more properties, allowing you to cover buildings & contents across multiple locations under a single policy.

• Home emergency cover – can provide emergency assistance for landlords, including access to plumbing, heating, roofing, drains, sewer blockages and locksmiths amongst other services.

• Rent guarantee – there to cover for when tenants can’t make rent payments, protecting you from any losses as and when they occur.

• Legal expenses cover – cover to assist with legal protection costs for property damage, recovering rent arrears, repossession, evictions or prosecution defence costs.

Taxes

Income Tax and Capital Gains Tax must be budgeted for, we recommend that you seek independent tax and legal advice as we are not qualified to offer tax advice. When you come to sell the property, if you’ve made a profit (capital gain) then you’re liable to be taxed on the profit, not the total amount you receive.

Letting agent fees

Letting agents offer a variety of support and can pay for themselves when it comes to handling more troublesome tenants. They can offer rent guarantees, tenant replacement and tenant moving out fees. Some agents also offer ‘fully managed’ services where they can arrange for any repair work to be completed with their own contractors.

Court and legal fees

It is wise to also budget for the worst-case scenario of having to evict tenants, and any resulting legal fees. Talk to solicitors and familiarise yourself with the potential costs here, and ensure you have funds set aside as contingency just in case.

Repairs, maintenance, and decoration

The cost of repairs and maintenance all depends upon how ‘hands on’ you are prepared to be. If you are experienced in this field you may wish to do it all yourself, and carry out the maintenance work when required, or if you don’t feel the inclination then it is advisable to find some trusted contacts you can call upon on a regular basis, and negotiate some preferential rates if possible. Allocate a realistic budget for ongoing repairs.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

There may be a fee for mortgage advice. The Financial Conduct Authority does not regulate some forms of buy to lets.

We do not provide tax advice, but can provide contacts if specialist tax advice is required

All the information in this article is correct as of the publish date. The opinions expressed in this publication are those of the authors. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.