Ask us for advice

How does conveyancing work?

FREE no obligation Quote
29th November 2021

5 Things you Need to Know Before Purchasing a Buy-To-Let

Becoming a landlord is a dream for many. Purchasing a property, acquiring some tenants and watching the money roll in. However, the process is certainly not as easy as it may appear. Recent changes have meant that it has become far more challenging to access the buy-to-let market. Letting properties has also become far more expensive and time-consuming. This article is for any aspiring landlords. We’ve provided our five tips to consider before purchasing a buy to let property.

Previously, investing in property to rent to tenants was seen as a lucrative source of income. For a few, it can become a career, whereas, for others, the property allows for additional funds alongside a full-time job. However, for aspiring landlords today, it has become far more difficult to gain access to this lifestyle, unless you have a financial cushion already available.


#1. New Rules Introduced by the UK Government

There are certainly some key changes that new landlords should be aware of before purchasing a buy-to-let property. These changes have been inflicted in order to professionalize the buy-to-let market and protect the rights of tenants. There are also amendments that have been made to limit the income made from buy-to-let properties. This has influenced tax rules as well as buy-to-let mortgages.

  • Electrical Safety Standards

There have been several changes regarding the electrical safety and efficiency of buy to let properties. There are certain rules that landlords are required to follow. For example, from the 1st April 2018, it was required that landlords maintain that their property meets an energy efficiency rating of E. It is likely that this standard will change to be more efficient as the government looks to tackle the climate crisis.

It is also important that landlords conduct regular electrical safety checks for the safety of their tenants. From the 1st June 2020, it was deemed necessary for electrical inspections to be performed at least every 5 years. This check must be completed by a certified and competent electrician.

  • No Tax relief on buy-to-let mortgages

In the past, landlords would offset their mortgage interest payments against rental income to reduce their tax costs. However, in 2015 it was announced by the UK government that this was to be phased out. It has been slowly reduced. In 2017/18, the tax relief that landlords were allowed to claim was reduced to 75%. In 2019-20 it was dropped to 25%. However, in 2021, the relief has been completely removed.

Instead, this tax relief has been replaced with a 20% tax credit. Despite this many higher-rate taxpayers haven’t found this particularly helpful. Alternatively, landlords have found that setting up a limited company allows you to offset costs more efficiently. This is due to corporation tax rates standing at 19%, which are far lower than tax rates for individuals. Nevertheless, it is important for new landlords to consider these recent changes and how this influences their long term affordability.

  • Higher Rates of Stamp Duty Land Tax

A significant factor that aspiring landlords should consider is that they’ll face a higher stamp duty payment if they already own a property. This is because, in April 2016, the government announced that there would be a 3% surcharge on second homes and buy-to-let properties in the UK.

The 3% surcharge exists in addition to the existing stamp duty rates. With this additional tax payment, the cost of purchasing a buy-to-let property is increased even further.


#2. A Large Deposit is needed for Buy-To-Let Mortgages

For many residential properties, a mortgage can be acquired with particularly small deposits. These may range from 10% to 20% or even 5% for first-time buyers. However, purchasing a property with a buy-to-let mortgage requires a more significant down payment to the mortgage lender. This is because most buy-to-let mortgages require a 25% deposit as a minimum. This amount can vary between 25%-40% depending on the lender you choose.

There are also some restrictions on who is eligible for a buy-to-let mortgage. Many lenders tend to follow the following criteria.

  • Age

Currently, borrowers must be over 21 years of age to acquire a buy-to-let mortgage. Whilst this does allow younger investors to access the letting market, a good credit score is also required which may hinder your chances for a few years.

  • Deposit

As mentioned above, buy-to-let mortgages require a larger deposit than residential based loans. This means between 25% and 40% of the property value is required as immediate payment.

  • Income

In order to assure the lender of your financial status and ability to repay the loan, there is a minimum income amount recommended. This amount is typically around £25,000. This criterion could be especially pertinent if you are a first-time landlord.

  • Credit History

Your lender will likely complete a thorough check of your borrowing history. As with any mortgage loan, lenders will want to ensure timely payments. If you have a history of bad credit, you may want to try to improve this before applying for a buy-to-let mortgage.


#3. Lenders won’t typically consider First-Time Buyers

Whilst it is possible for first-time buyers to acquire a buy-to-let mortgage, most lenders are weary surrounding this group of individuals. An exclusive number of lenders across the UK will consider applicants who show secure affordability and financial security, however, the majority of applicants are considered too risky.

The main concern for many lenders is the intention of the buyers. They will typically question why the individual is purchasing a buy-to-let property, without buying their own home first. If you are in this position, this may also be something you need to consider. Owning your home comes with a sense of financial security. Completing a mortgage payment provides financial security and reduces monthly outgoings. This puts you in a far better position for paying a buy-to-let mortgage.

There are certain expenses you may not have considered associated with buy-to-let properties. As such, individuals who are yet to pay off their mortgage even struggle to acquire a mortgage. You should be aware that you may have gaps in tenancy where you have to cover the cost of the mortgage without rental payments. You may also have to complete costly repairs and commit to insurance plans to protect your property. Without the collateral of an existing property and the financial security of a mortgageless homeowner, lenders will struggle to accept applications from first-time buyers.


#4. Know the Area and the Property

For new landlords, it can be exciting to find a property that looks particularly desirable. You may find a two-bedroom apartment for example that is particularly affordable and easy to renovate for renting. However, knowing the rental value of the property is just as important as the purchase value. There are several factors that can stop you from making a profit or even covering the costs of a buy-to-let property if you make the wrong choice.

Rental Yield

Before committing to the purchase of a property, calculating the rental yield should be a high priority. Ideally, buy-to-let properties should be in a position where the monthly rent is higher than the monthly mortgage repayment. If this figure becomes closer to parity, it may become challenging to maintain repayments on both loans at once.

To calculate your rental yield, there is a simple calculation to indicate how much extra income you will acquire. A rough rental price can be acquired from online listing websites such as zoopla, or a valuation survey can be completed to give a more accurate rental amount. Using this figure you can calculate your rental yield

  1. Take the yearly rental income of a property
  2. Divide this by the price paid for the property
  3. Multiply the figure by 100 to get the percentage

For example, a 2 bedroom flat for sale in Cardiff costs £260,000. The typical rental amount for this property is around £1000 per month. The yearly income for this price would be £12,000. Using the above calculation, your rental yield would be 4.6%. It is generally considered that between 5-8% is a good rental yield.

Research the Area

Not doing adequate research into the property and its surrounding area could be cause for serious losses when purchasing a buy-to-let property. You need to be able to acquire a property that will cover its own costs, as discussed above, but will also attract tenants. Tenants are the individuals who provide the money to pay the mortgage and cover the fees associated with letting. Without tenants, you must cover these costs yourself and face severe losses.

There are certain factors that all tenants will look for when searching for a property. To have a consistent stream of tenants, or to secure long-term tenants, you need to meet these desires. There are plenty of examples to guide you in this decision.

  • Transport links

This is especially valuable for commuters or properties outside of built-up areas. You may not attract tenants if they can’t get to shops or their job.

  • Provide a pleasant place to live

Whilst many landlords assume that letting is as simple as acquiring property and renting it out, there is plenty of maintenance to stay on top of. People won’t pay rent if the living conditions are poor. This could be due to dampness, properties in disrepair or that are not functional.

  • Property Demand

Your checks of the area should determine whether there is a demand for rental properties. Areas that will likely allow you to keep consistent tenants will include universities with an abundance of students, popular areas with young families and commuting towns or city suburbs.


#5. Do Your Research

Our final point of guidance regarding buy-to-let properties is to properly research before making an investment. You should thoroughly consider whether investing your money in property is going to give you the best return. Ensure that you speak to a financial advisor and discuss alternative options for investing your money. For some, having a large amount of cash available immediately will allow you to make a quick return and start paying yourself back. However, for individuals that have to take out high-interest mortgages, the rewards may not be so sweet. You’ll spend more time paying fees than enjoying the income.

Some savings accounts offer 3-5% return for annual incomes. This is a more immediate return from your investment. However, some individuals enjoy the project aspect of being a landlord, you may be able to purchase an unloved property, invest time and resources to renovate and raise the value before renting it out and provide somebody with a home. To do this, additional finances are required. Calculate your best options and your intentions for doing so. This will be the best option for making decisions for buying to let.