If you are already in the buy-to-let market, you’ll be aware of the ups and downs of being a landlord. But if buy-to-let is new to you, knowing where to start might seem a little daunting.
Purchasing property as an investment can involve a complete change of mentality. It’s likely that the main factor when you’ve bought a home in the past has been to find somewhere to live. When you’re looking at buy-to-let though, it’s about finding somewhere that will give you a monthly return and make you money in the long-term.
- How healthy is the buy-to-let market?
- Is investing in buy-to-let worth it?
- The pros and cons of buy-to-let
- Buy-to-let insurance
- Is a holiday home a better option?
The number of buy-to-let properties with mortgages on them has been steadily growing over the past few years, and according to UK Finance by late 2021 there were more than two million.
This isn’t an exact way of measuring the health of the market, because it doesn’t include cash buyers or properties that have had their mortgages paid off, and it’s thought that the number of mortgage-free properties exceeds those with loans on them. But the growth does suggest that the lending market for rental properties is doing well.
At the same time, the number of mortgages available from lenders has also seen a steady increase. According to Moneyfacts.co.uk, there were 2,968 buy-to-let mortgages on offer for borrowers at the start of September 2021, as opposed to 2,897 in March 2000. That’s the highest figure since October 2007, before the financial crash.
This increased competition has seen a fall in mortgage rates as the rates for both two-year and five-year fixed-rate loans are the lowest they have been for nearly a year.
There are always variations within the overall figures though, and landlords with smaller deposits have access to fewer products than two years ago, and can expect to pay a bit more for their borrowing.
It’s important to remember that the situation can change quickly and without warning. Whether it’s a global event – such as a financial crisis or a pandemic – or a domestic policy change, there are many factors that can upend the mortgage market and you should factor this into your thinking before deciding to invest.
There is no one-size-fits-all answer. To find out if it’s right for you, you’ll need to do several things:
- Find the right mortgage if you require a loan.
- Work out the yield.
- Decide how hands-on you want to be.
- Understand the tax implications.
Of course, some of the decisions you make on these factors will have a knock-on effect – being less hands-on is likely to cut your yield.
Finding the right mortgage
The wide range of options in the buy-to-let mortgage market can be daunting, but there are several things you can do to help simplify the search for a loan.
It can be worth speaking to your current bank. They will only be able to give you information on the products they offer, rather than market-wide, but if you already have a strong relationship with them then you might find the application process is easier.
Alternatively, you can consult a mortgage broker that specialises in buy-to-let. One advantage of this approach is that a broker will have access to a wider selection of lenders and products. A specialist broker will also be familiar with issues that are particular to buy-to-let customers, and if you’re a new landlord you might benefit from the broker’s all-round knowledge. Make sure you have checked the broker’s fees in advance though.
How to work out the yield
Your main goal may be to buy a property to rent out now and sell it for a profit in a few years’ time. But you’ll want to be earning an income from it in the meantime.
The yield is a figure that refers to the annual return you make on the price you paid for the property.
To calculate the rental yield, you need to divide the total annual rent by the value of the property, and then multiply that figure by 100 to get your percentage. For example, if you pay £200,000 for a house and your annual rental income is £12,000, the yield is 6%. To compare this with other traditional investments, to get the same level of income on £200,000 in a savings account, you would need to find an account that pays 6% interest.
Make sure to be realistic and do your research of the local market. If you are aiming to charge tenants £1,000 a month, but there are similar properties in the neighbourhood charging their tenants less than that, you may struggle to find occupants.
There are also other factors to consider that can affect your yield. You might have to spend money on repairs and maintenance, and if there’s a period where the property is not let your income will fall to zero.
Deciding how hands-on you want to be
One of the key decisions you’ll have to make is whether you want to manage the property yourself or engage a lettings manager to do it for you.
If you do it yourself, you’ll have to find your own tenants, be the point of contact for them once they’ve moved in, arrange any repairs and tradespeople, and look for new tenants when the property becomes vacant.
Instructing a lettings agent to do the day-to-day work makes things a lot easier. They can help guide you through your landlord responsibilities, and you can use their expertise when it comes to the myriad obligations you face, including gas and electrical safety, deposit schemes, environmental obligations and fire regulations. However, in return they will take a cut of your rental income (which you will need to factor into your yield calculation).
Understand the tax implications
The tax situation for buy-to-let landlords can be complex so it can be worth speaking to a financial adviser to see how it affects you – especially if you’re a higher-rate taxpayer.
Amongst the more recent developments have been the abolition of tax relief on mortgage interest, and the introduction of a stamp duty levy.
“Landlords are now filing their returns for the first time since the tax relief was completely removed,” says Chris Norris, Policy Director at the NRLA.
“It’s been tapered gradually since 2015 but has now been phased out completely and replaced with a tax credit.
“There has also been the introduction of an extra stamp duty surcharge of 3% in England and 4% in Wales. This is on top of existing stamp duty.
“Landlords pay this extra stamp duty levy on the entire purchase price, regardless of how cheap or expensive a property is.”
If you achieve a decent yield, you can enjoy income from what is a relatively secure asset that provides long-term security.
As well as the regular income, your overall wealth will increase in line with house prices. There’ll always be peaks and troughs in the market, but property investment over the long-term usually sees the value of your assets increase.
There is a shortage of housing in the UK and no sign that demand for accommodation will wane any time soon.
Investments in bricks and mortar can’t be disposed of as quickly as shares or other investments can. Selling a property can take months – and if you need to get your hands on the money urgently, you won’t be able to wait until the best time to sell in the market cycle.
Despite the long-term trend of prices going up this is not guaranteed, and your property might end up being worth less than you paid for it.
You also need to be aware of the possibility of mortgage rate rises and make sure that the property is still affordable, and a good investment, if this were to happen.
Once you’ve decided to take the plunge, you will need to sort out your landlord insurance. Standard home insurance doesn’t cover you for buy-to-let – if you put in a claim and your insurer finds you weren’t properly covered, the claim will be rejected and you may find your policy has been cancelled.
As with all insurance policies, the level of cover will vary depending on your requirements. By using an independent broker such as Alan Boswell Group, you can tailor your buy-to-let insurance policy.
The risks you can take out cover for include:
- Building insurance.
- Rent guarantee insurance and legal expenses.
- Damaged contents.
- Loss of rent and the cost of rehousing your tenants if the property becomes uninhabitable.
- Property owner’s and employer’s liability insurance.
- Malicious and accidental damage caused by tenants.
- Home emergencies.
It is possible to earn up to three times as much rental from a holiday home compared with a buy-to-let property, but there are many more costs involved.
Agents’ fees are higher, you need to pay for regular cleaning, there’s more admin work in dealing with each visitor’s damage deposit, you need to budget for marketing costs, and you might find that the property sits empty outside the peak holiday seasons.
You will also need to look for a specialist mortgage, as they are different from buy-to-let loans, and find a suitable insurance policy.
With many different tenants coming and going throughout the year and the possibility that multiple keys to the property are in circulation, it’s easy to see why a specialist insurance policy is required for holiday homes.
It also depends what sort of holiday home you have – a large villa with a hot tub in a busy holiday hotspot will require a different sort of policy from a small cottage in a small village.
What to look out for in 2022
Buy-to-let landlords have seen changes to the taxation system over the past few years, with changes to mortgage interest relief and the introduction of a 3% stamp-duty surcharge, for example.
As the government looks to recoup the money it has spent during the Covid-19 pandemic, there’s always the risk of a further tax raid on the sector.
Chris Norris, of the NRLA, said: “We are very wary of what might happen to capital gains tax in the spring budget. There is also uncertainty about the stamp duty levy.
“It would be easy for the chancellor to increase both of these, and they’re not the sort of things that tend to generate much public sympathy.”
Mr Norris also said the rental sector was waiting to find out the impact of government policy on green retrofits, which could prove costly for landlords.
Investors should also be cautious of the possibility of a rise in interest rates. With inflation set to remain high for the medium-term, the Bank of England could start to act, which will make the cost of mortgages more expensive.
If you have a fixed-rate mortgage on your buy-to-let property, make sure you have an idea what your monthly repayments might jump up to when the term expires.
The cost of living might impact the ability of your tenants to absorb higher costs, so if you think you need to put your rent up, considering starting a dialogue with them in good time.