A common statement I hear quite frequently is, “I want to buy a property then rent it out.” This blog will cover what you need to consider if you are thinking to purchase a property to rent out as opposed to living their yourself.
You need a Buy to Let (BTL) Mortgage
If you would like to buy a property and rent it out, you need to have a BTL mortgage.
NB. You can’t live in a property you own with a BTL mortgage. Generally, you will need at least a 25% deposit to get a BTL mortgage. Most lenders will also want you to have an annual salary of at least £25,000.
The amount you can borrow on a BTL property is calculated differently
Unlike a residential mortgage, where the amount you can borrow is based on your salary and spending, a BTL mortgage is assessed on the rental income that the property is likely to generate. Lenders will typically request that the rental income is at least 125% of the monthly mortgage payments. BTL mortgages also tend to be on an interest only basis rather than on a repayment basis.
Buying a BTL property as a first time buyer may be a little difficult
It is possible for First Time Buyers to obtain a BTL mortgage, however, options available may be limited. Some lenders require you to have owned a residential property for at least six months before they will offer you a BTL mortgage. Some lenders just need you to own a property, so you could have another BTL property but live in rented accommodation.
Consent To – Let could be an option
If you already own a property and are planning to become a landlord, you need to inform your lender about your intentions. Consent to let is when your lender gives you permission to rent your property out for a specific period of time.
NB. Lenders may charge an extra percentage rate on top of your normal rate or there may be a fee to gain consent. Some lenders may even charge both. The cost of consent to let varies from lender to lender, so you may need to call your lender to ask if they allow consent to let and what they charge.
NB. Bare in mind, that if you use consent to let you will still technically have a residential mortgage. Therefore, you will not get the same high rental yield that you would likely get with a BTL mortgage.
How will you manage the property?
It is important to also consider how you will manage the property. Many people want to buy a property that is in close proximity to their old university. In theory, this is a good idea as it’s likely that you will know the area well and have first-hand knowledge of potential rental income you can achieve, however it is also important to consider that travelling costs and the administrative effort needed to manage a property yourself.
Will you manage the property yourself? Or will you hire a Property Manager to manage it for you. Ensure you consider the additional costs associated with hiring a Property Manager as this will have an impact on your monthly profits.
2nd Home Stamp Duty
If you were to purchase a BTL property first, you will be liable to pay a 2nd home stamp duty surcharge if you were to decide to purchase a residential property. This is something to consider when buying your first property. Will you want to buy a residential property soon? If yes, don’t forget the extra stamp duty charge you will incur.
NB. First Time Buyers are only exempt from paying stamp duty on residential purchases under £300,000. If you purchase a BTL property you will have to pay stamp duty regardless of whether you are a first time buyer or not.
*This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.