Guide to buyt-to-let investment Part 3

Applying for a buy-to-let mortgage

Firstly, we recommend to sit down and run through your finances to compare the cost you’d pay for the property, against the likely rent you can collect from tenants. This will help you identify firstly if the investment is likely to be profitable, and over how many years, which is useful to take into account when looking at obtaining a buy-to-let mortgage.

A mortgage adviser could talk you through this so you have a clear idea of whether you can comfortably afford the mortgage on your own. When you’re ready to apply for your buy-to-let mortgage, we will be able to arrange an appointment that can help to fit around you, whether that’s face-to-face, online or over the phone.

We are ready to share our knowledge and experience to help to find you the most suitable deals for your circumstances. We know that no two mortgages are the same, and we’ll aim to listen to your needs and recommend the most appropriate products.

Searching the market yourself can be time-consuming, but with our help, we can search thousands of mortgages. We have regular contact with a wide range of lenders, and with our help, you won’t necessarily need to search or contact each individual lender to compare mortgage terms and rates, we will aim to do all of this for you.

We’ll explain the process in order to help you make a start in your buy-to-let journey. We will go through details of the different fees involved, what they are for, and take them into account when finding the right mortgage deal for you. We are also passionate about protecting your buy-to-let property, so our advisers will recommend a range of protection policies available to suit your circumstances.

We have a duty of care for you too, and we are keen to point out that your home may be repossessed if you do not keep up repayments on your mortgage.

How much to borrow?

Before diving in, because buy-to-let can be a medium to long term investment, ask yourself whether you can afford to tie up your money for a long period of time. Buy-to-let mortgage rates are constantly changing and variable by nature, but generally depend upon the following factors:

• Credit score

• Amount of deposit put down

• Level of risk in the loan for the lender

• Type of mortgage product recommended for your circumstances

It’s always worth seeking advice from a qualified mortgage adviser before making any firm decisions, especially as chances are you will be investing a significant sum into a buy-to-let venture. Your borrowing (and speed of paying back) will be dictated by the amount of rent that you can derive from your property.

The amount you can reasonably charge for rent will be driven by the market itself. Compare prices online at Rightmove and Zoopla to get a feel for prices at similar properties.

Choosing the right mortgage

It is always advisable to speak to a mortgage adviser for this stage, we will listen to your circumstances and help to recommend the most suitable mortgage products available to you, based on searches from a wide range of lenders.

Broadly speaking, there are typically two main types of payment methods - repayment or interest-only. In a repayment mortgage you would make monthly payments towards both the interest and the capital borrowed, so by the end of the mortgage term you could potentially repay the entire balance, whereas with interest-only mortgages, you would typically only pay the interest only, with the outstanding balance remaining.

Majority of buy-to-let investors typically opt for the interest-only mortgage option, which can be useful if intending to sell the property at the end of the mortgage term, after which you would repay the mortgage capital outstanding. The benefits of interest-only mortgages mean lower monthly payments which can leave more disposable cash from the rental income to cover any additional costs when occurring.

There’s also choice on fixed or variable rate mortgages, with the fixed rate, they remain stable regardless of interest rate fluctuations, and for a landlord this could enable greater stability in managing cash flows.

As always, the best course of action is to speak to an expert mortgage adviser to assess your situation and listen to your needs before recommending the most appropriate mortgages to suit your needs.

Consider all the costs

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.

There may be a fee for mortgage advice.

We have made reference to investments in this guide, however please note that we do not provide legal / tax advice. Please ensure to seek independent tax / legal advice if this is required.