For landlords looking at a rental property you’ll need a buy-to-let/rental mortgage which is different to a residential mortgage.
You will need a larger deposit and expect a higher interest rate.
Mortgage repayments make up the highest costs of being a landlord.
As a result it’s important landlords understand the mortgage principles.
Below are some of the factors landlords need to consider when taking out a mortgage, as well as other costs a landlord will encounter.
- What is the lending criteria for landlord mortgages?
- Should landlords go for repayment or interest only?
- What are the risks related to buy to let properties?
- Where to find a buy to let mortgage?
- Other landlord costs related to a buy to let investment
- Where to find a good property manager?
What is the lending criteria for landlord mortgages?
- Residential mortgages are calculated on the basis of your salary. However buy to let mortgages are based on the rental income you are expected to receive. If the rent is 20-30% higher than the mortgage repayments, that’s a good start.
- A large proportion of lenders also require a minimum income of £25k per annum. This is In addition to the income made from rent.
- Deposit wise, a 75-80% LTV rate is expected by lenders.
- Most buy to let mortgage lenders lending to individuals impose a maximum age of 75 on maturity of the loan.
Should landlords go for repayment or interest only?
For landlords looking for for a mortgage, you may choose a repayment option. Your monthly mortgage repayment will be higher therefore profits lower, but you will be reducing the property debt.
With interest only, your monthly mortgage repayments will be lower as you are only paying interest (not the debt). Therefore you will receive a higher monthly profit.
At the end of the mortgage term, you will have to pay off the mortgage, usually landlords sell their property/remortgage to cover the debt or remortgage.
Relying on selling your house to pay off the mortgage does have an element of risk. If house prices fall, you might not be able to sell for as much as you had hoped. If this happens, you’ll be left to make up the difference on the mortgage.
However analysis over the last 30-40 years indicates this is a low risk, especially if landlords hold onto their properties for many years.
Taking out an interest only mortgage type reduces one of the largest ongoing costs of being a landlord, until the repayment is required.
What risks should landlords be aware of?
No investment is 100% safe. There are always risk in buying a property, more so if the property is for rental purposes.
Typically a landlord will rely on rental income to repay a mortgage. So if you are unable to secure a tenant or a tenant is behind on rent, there is a chance they won’t be able to keep up with their mortgage repayments, risking repossession.
Property managers & letting agents offer a guaranteed rent service which will alleviate this risk. This service ensures landlords are provided with rental income, even when the tenant defaults on their rent.
If there is significant damage to your property caused by tenants, wear & tear or incidents, this can leave your property unoccupied for a period of time, resulting in a loss of rental income.
Your lender may offer you a payment holiday, freezing your mortgage payments usually up to a maximum of 6 months.
In terms of the cost of the damage, your insurer may pick up the bill.
However if for whatever reason your insurance is void or doesn’t cover the damage in particular, you may find the costs difficult to cover.
Its a good idea for landlords to save a pot of money aside each month to cover issues such as the above.
Property market crashes
Like in the 2008 financial crisis, properties either reduce in value or just can’t sell.
If you’re holding on to your property for the long term, you’ll likely just need to wait out any property crashes.
However you may find yourself in a position where you need to sell. For example you’re coming to the end of your interest only mortgage or you lose your job.
If you can’t cover mortgage payments, your property may be repossessed. This may lead you to selling your property lower than it was pre-crash.
Adding to the problem, your buy to let mortgage guide may be close to its fixed term. After the fixed term or a mortgage, the interest rate your lender charges switches to a standard variable rate, SVR.
This rate is usually far more than the rate you were taking during the fixed term.
If you’re looking to renew your mortgage during a property crash, the value of the property may not be enough to cover the mortgage, or the loan to value rate may drop a bracket.
In this scenario you’ll either need to foot the shortfall yourself via your savings or take the hit with the higher rate.
The problem is worsened that during a property market crash, the economy is taking a massive hit at the same time.
For a lot of people, this means their jobs are on the line. With the risk of higher monthly mortgage repayments due to the property losing value and job loses, many can face dire situations.
Interest rate hikes
Interest rates are at their lowest ever (at the time or writing, 0.1%!).
This is great for landlords looking for cheap mortgages.
If the interest rates were to increase, so would the monthly payments due to lenders for those on tracker mortgages.
In addition the rates offered on the market will be higher, raising costs for landlords looking to renew their mortgage.
In 2020, we’ve seen the first true modern pandemic, Covid-19.
The world is on hold. People are working from home, leisure activities are on hold and the property market is frozen.
Similarly to a property market crash, its extremely hard to sell your property during a pandemic.
Viewings pose a risk to catching the virus and availability of solicitor, conveyancing teams and agents is low.
If you are in desperate need of selling your property, it’s unlikely you’d achieve that objective at a price that’s fair to you.
For a variety of reasons, property purchases may be done under a partnership.
The cost of property or spreading the risk are two reasons why partnership purchases are on the rise.
However money can put a strain on partnerships. There could be disagreements on whether to keep or sell the property or any work the property needs.
When there are disagreements with a lot of money involved, legal proceedings and further disputes can occur.
Where to find a buy to let mortgage?
The market is saturated with mortgage providers. As with every financial commitment, it’s best to shop around.
Moneyfacts provide a comparison of buy to let mortgage rates. This can be used to ensure you reduce your largest landlord cost of monthly mortgage payments.
Below is a snapshot of various rates that can be expected when looking for your buy to let mortgage
Other landlord costs related to a buy to let investment
Capital gains tax is a big tax hit landlords face when it comes to selling the property.
If you’re a basic rate tax payer, CGT on buy to let second property’s is charged at 18% and if you’re a higher or additional rate tax payer it’s charged at 28%.
You can reduce your CGT bill by offsetting costs like Stamp Duty, Solicitor and Estate & letting agent fees. Additionally losses made on a sale of a buy to let property in a previous tax year can be deducted from capital gains.
All purchases of a property usually include a proportion of stamp duty to be paid to the government. However for purchases of a second property, the costs are substantially higher.
From the 1st April 2016 anyone purchasing a property in addition to their main home needs to pay an additional 3% SDLT for the first £125,000 and 5% instead of 2% on the portion between £125,001 and £250,000 and 8% on the amount above £250,001.
This increase in stamp duty means landlords need a far higher pot of cash to purchase a rental property.
Property manager fees also add to a landlords costs. When you’ve got your mortgage & purchased your property, one of the next steps will be to find a tenant.
This involves a variety of activities which include advertising, viewings & tenant screening.
As these tasks are expensive & cumbersome, landlords often opt for a property manager. A property manager will take over a lot of the duties when it comes to running the rental property. In exchange, the landlord will need to add the property managers fees to their costs.
Property manager costs differ depending on the properties location & services needed by the landlord.
Use Rent Round to save on landlord costs
Now you’ve read our landlord mortgage guide, Rent Round can find you the perfect property manager or letting agent for your rental property.
Our platform enables landlords who have their landlord mortgage and property, the opportunity to compare property & letting agents in their local area.
Through comparing agents, landlords can save money on agent fees, reducing one of the most significant costs of being a landlord.
Our agents have screening processes to find quality tenants and have the best building contractors to quickly & cost effectively fix any property damage.