A common statement we 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 there 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

In theory, you could get a residential mortgage and apply for Consent to let later on down the line. Consent to let is when your lender gives you permission to rent your property out for a specific period of time.

NB. There is no guarantee that your lender will give you consent to let, furthermore, lenders may charge an extra % rate on top of your normal rate or there may be a fee to gain consent. Some lenders may even charge both. The cost & conditions of consent to let will vary from lender to lender.

NB. You will still technically have a residential mortgage even if you are granted consent to let. Therefore, you will not get the same high rental yield that you would likely get with a BTL mortgage.

You can get a lodger

You can earn £7500 a year tax free if you rent out a spare room in your property to a lodger.

This allows you to get on the property ladder.with a residential mortgage  but also earn rental income from any spare rooms.

NB. A landlord can choose to evict the lodger if they refuse to leave, even after the end of a fixed term agreement and having been informed about the notice period, peaceably. For example, renting out the room to someone else while the lodger is out or changing the locks so the lodger cannot enter the property.

How will you manage the property?

It is important to 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.

Property management includes:

  • Repairs & maintenance
  • Rent collection
  • Property inspections
  • Meeting legal requirements
  • Deposit protection

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

Additional home purchases will have to pay an extra 3% surcharge on top of each stamp duty band. A 2nd home costing £400,000 will come with a 2nd home stamp duty surcharge of £22.000 compared to the normal £10,000.

NB. Stamp duty rates are payable only on the portion of a property price which falls within each band.

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.

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