Buy to Let Mortgages

Like a lot of things the buy to let market suffers with highs and lows. With the way the market is currently buy to let seems to be on the up due to there being a lot less first time buyers and an increase in demand for rental properties. Buy to let seems to be booming at the moment and a lot of it is thanks to T.V shows books and press. People who once trusted pensions and shares have decided to invest their money into property.

So what are the risks with buy to let investment?

If you don’t do the research then it could all go sour, you need to know the area that you are buying in and you need to know the rental demand in that area. Just because you are not going to be the one living there it doesn’t mean that you should just buy anywhere. You need to think about the sort of tenant that you are aiming at, whether that be students, professional or a family.

The best way to start your research would be to ask local estate agents or letting agents to give you some information about what the area that you are thinking of buying in is like and who is likely to want to rent a house there. You need to see if the property is close to something that your target tenant will be after for example a hospital or schools. You need to think about if you are going to manage the property yourself or let a letting agency do this for you.

Is there a reputable letting agent nearby who is willing to take your property on to their books? You need to set yourself a budget and stick to it, its no good purchasing a property and then having no money left to decorate it ready for letting out. You also have to remember to keep some money to one side in case your property is empty and you have to pay for the mortgage every month until you find a tenant.

Know the property you are about to buy.

Make sure that you protect yourself at all times when purchasing a property. You need to make sure that you get a mortgage valuation carried out quite early on so that if anything is wrong with the property you haven’t wasted a lot of time and money. If you are still going ahead with the purchase and the valuer has uncovered some things that require work doing its best to get all work carried out as soon as you can so that you can get a tenant in to pay the mortgage payments and you are not losing money. Once you own the property and your tenant is ready to move in make sure that you have got everything required by law in place for example the gas safety certificate.

So what is a buy to let mortgage? When you take out a buy to let mortgage it is on a house that you or your family are not going to be living in. It is on a house that you will rent out to a tenant who will pay you a monthly rental amount each month that will cover your mortgage payments. A buy to let property is an investment and although when you first buy the property it might seem like you are the one paying out in the long run your property will go up in value and earn you money and your tenant is in effect paying your mortgage for you.

How does the lender assess if I am suitable for a buy to let mortgage?

Normally a buy to let lender will not look at your income as lenders tend to do for residential mortgages. As long as the rental income is enough to cover the outgoing mortgage payments then the lender is happy.

What you have to think about is when your investment property is empty are you going to be able to pay the mortgage on it, that is why it is important to get a tenant in as soon as you can. In some cases a buy to let mortgage lender will say that you have got to have a minimum income of around £15,000 - £25,000 per annum.

The mortgage lender will also only lend on a suitable property, they will need a copy of the valuation report and it will need to tick all of there criteria boxes before they will consider lending on it. They will not let on a property that has been put down as a bad state of repair, some lenders won’t lend on a type of concrete that the property is made from so you have to take all of this into consideration.

Getting the right mortgage deal

How to get the deal that is right for you.

You need to find the right deal that fits you. Most buy to let mortgage are between 75% and 85% loan to value (LTV) which means that you need a decent deposit to be able to put down depending on the type and price of property that you are purchasing. When you are applying for a buy to let mortgage you need to have a good idea of what you think the expected rental income will be achievable each month.

Most buy to let mortgage lenders are very competitive but they all have their own little quirky things that they accept and don’t accept so it’s not all about the lowest rate, you have to really look into all of the pros and cons of each available lender and make sure that you check the small print.

Some deals may seem perfect and in some cases they will be but remember to check the early redemption penalties and things like that. It is highly recommended that you use a mortgage broker as they know the market thoroughly and will be able to recommend a buy to let mortgage that is just right for you and they look at the entire range of mortgages available and not just a selected few.

Tax implications

Tax Implications on buy to let investments.

Income Tax

You need to be aware that the Inland Revenue will tax any individual who is making a profit from a buy to let investment. For example if you earned £10,000 per annum in rental income and had £2,000 expenses and your interest on your buy to let mortgage was £6,000 then you will have earned £2,000 in profit for the year. The Inland Revenue would then assess this profit and would tax you normally 40%
Capital Gains Tax

On your own residential property that is owner occupied you are free from capital gains tax when the property is sold but on a buy to let you are liable for this tax. The rate of capital gains tax that you will have to pay will depend on the earned income from the buy to let property. Everyone has an annual allowance of capital gains tax exemption so the tax is only payable above this amount.
What Can you offset against tax

What are classed as expenses on a buy to let property?

Costs that can be claimed on expenses – You can claim for any repairs that you do to the property such as a broken door or window of even a repair to the roof but when it comes to taking the whole roof off when there was no damage thing change slightly as this goes beyond a maintenance job. Below is a list of things that you can claim against your expenses for:

• General redecoration of the property internally and externally this includes anything that you may purchase including paints and screws
• You can claim for the cleaning of your property
• Damp treatment
• Broken windows and doors
• Mending or replacing roof tiles
• Guttering

You may also be able to claim for a number of other things but you would need to check before you carried any work out otherwise it might have to come straight from your pocket.

Wear and tear!

You cannot offset the first outlay of furniture that you provide in your rental property but you can make a deduction for wear and tear. This means that you cannot claim anything for the first settee that you provide in the property but if you need to replace the settee and some point you can claim for the new one and costs that you have paid for it. You can also add an allowance of 10% to the rent that you receive to cover things like a new fridge and freezer.

So you have got two options and you can only choose one of them that suit you the best. If you opt for the 10% added allowance on the rent then you have to stick with this decision and you cannot change it, you cant go and change your mind and want to replace itemized furnishings.