26 Oct 2016
Author: Stephen Breen
If you’re thinking about branching out into the buy-to-let investment market, there are a number of considerations. Whether buy-to-let is right for you as an investment will depend on your individual circumstances. Here, we look at some of the steps you need to take and the factors you might want to consider.
What are your reasons for wanting to invest?
Everyone has different reasons for wanting to go into the buy-to-let market. A common one is to pay off their existing mortgage or debts. Often people will also have savings (such as an ISA) – and it pays to look at whether the interest you are earning on the savings exceeds the interest you’re paying on your mortgage or other debts. If not, it makes sense to use your savings to reduce your mortgage or debts, starting with the most expensive line of credit (i.e. the one with the highest interest rate).
However, you shouldn’t use all of your savings – the Money Advice Service recommends that you keep enough to pay for at least three months’ of essential outgoings, just in case you lost your job or split up with your partner.
Of course, if you do use your savings to reduce your debts, this will limit what you have towards a deposit on a buy-to-let investment. You need to decide whether your priority is to be mortgage free, or whether you are happy to take on the financial risks of an additional property. These include the additional debt, interest rate increases, repairs and maintenance costs, the costs associated with problem tenants, void periods when you receive no rental income and the risk of house prices falling in the future.
A further consideration is whether or not your pension and any other savings/investments you have will allow you to maintain a decent standard of living later in life. If not, making a sensible investment in a buy-to-let property could help provide a more secure future.
Doing your research
If you have your heart set on buy-to-let, the first step is to consult with a mortgage broker. They can advise you whether you would meet the buy-to-let lending criteria, the maximum amount you could borrow based on your financial circumstances and what your monthly repayments would be.
Most lenders offering buy-to-let mortgages will expect your earnings to be at least £25,000, and will look for a 25% deposit. Lenders will take the rental income into account when calculating how much you can borrow. If, for example, the rental income is £500 a month, you can expect your maximum amount to be around £80,000.
Once you know the maximum amount that you can borrow, you then need to research the properties that you could purchase for this figure. Speak to letting agencies in the areas you’re looking to buy in – they will usually be happy to give you advice as they will be eager to acquire your business later down the line. Ask about demand from tenants, typical rents for the properties you’ve found, and outgoings.
Give some consideration to holiday properties – an increasing number of lenders now offer mortgages targeted specifically at holiday lets, and the returns can be generous. Even though the buy-to-let market is undergoing change (see ‘Additional Considerations’ below), holiday lets are still popular.
Once you’ve found a property you like, speak to an accountant about tax implications.
Could you remortgage?
Another option might be to remortgage your existing property to raise funds for the buy-to-let property at a low interest rate. The remortgaged funds coupled with your savings may be enough to purchase the buy-to-let property without the help of an additional mortgage. If you go down this route, you need to hold back part of your savings for essential outgoings as mentioned above – and you also need to factor in the increased mortgage payments and any unexpected repairs.
Buy-to-let purchases now attract a higher rate of stamp duty. The amount payable depends on the value of the property, as follows:
- £0-£40,000 – 0%
- Over £40,000-£125,000 – 3%
- £125,001-£250,000 – 5%
- £250,001-£925,000 – 8%
- £925,001-£1.5m – 13%
- £1.5m+ – 15%
Although 0% is paid on properties valued £0 – £40,000, 3% is payable on the full value of a property value of properties valued over £40,000. So if your buy-to-let property is valued £45,000, stamp duty will be £1,350.
Another important consideration is that buy-to-let tax relief is changing from April 2017. Until then, tax will be payable on your net rental income after you’ve deducted allowable expenses which include mortgage interest. From April 2020, tax relief can only be reclaimed at basic rate (20%), whatever rate of tax you pay on your other income. Between April 2017 and April 2020 the rules will be phased in gradually. See our article: Avoiding the buy-to-let tax blow for more details.
If you are considering a buy-to-let investment and you would like advice, speak to our property team.