Types of Mortgages

If you are unsure about buying a house to live in, but still want to buy a property, then buy to let properties could help you get your foot on the property ladder. This is when you buy a property purely to then rent it out. This guide will cover what the advantages and disadvantages are of getting a buy to let property. It will also outline the first steps to getting started on becoming a landlord.

Why do people get into buy to lets

Buy to let properties can appeal for a lot of reasons. For example, house prices today make it very hard for people to get onto the property ladder. So, if you buy a house and then let it out, you can make money from your investment. In most cases the money you earn from rental income should be enough to pay for the mortgage on the property. Additionally, as you would own a property, you can then borrow money against it in the future. This would make getting a mortgage for your next property much easier.

If you continue to invest in buy to let properties, you could build up a passive income. Once you have enough properties, this passive income could become your main source of income, meaning you would have to work less.

Also, if house prices continue to rise, in the long term you could make money on the property. So the house that you bought would increase in value. If you decided to sell it, you could possibly get more money back than you paid for it.

What to watch out for

Recent changes to the laws surrounding buy to lets have made it a less profitable, and much riskier, option. The first of these was in 2016, when the government added a 3% surcharge in stamp duty. This affected additional properties, for example buy to let properties or second homes. Stamp Duty land tax is a payment made if you buy property or land over a set price in England or Ireland. There are alternatives in both Scotland and Wales.

Secondly, in 2017 the government reduced mortgage interest relief. Previously, landlords had been able to deduct the interest they pay on their mortgage before paying tax. This meant that most higher rate taxpayers would have 40% tax relief on mortgage payments. But, landlords will now have only a 20% tax credit on their mortgage interest.

Key Criteria & Application Guidance

As well as tax changes, being a landlord means you’ll be taking on a lot of responsibility. You will be required to provide suitable living conditions for your tenant, dealing with broken appliances, structural damage, mold and more. There is also a substantial amount of risk involved. You may not be able to fill the property full time, and so could lose out on rental income when it is empty. If you don’t have insurance that covers these periods, then you would have to keep making mortgage payments without the income from the property.

In the same way that property prices could rise, they could also fall. If this happens then you could lose a large amount of money in the form of value. To make matters worse, your repayments would still be based on the amount of money you borrowed, instead of the current value of the property.

Buy to Let through a Limited Company

A Limited Company is a business structure where the company and the shareholders are kept separate, as the company has its own legal identity. There are a few advantages to getting buy to let properties through a Limited Company. Firstly, you could avoid the recent changes to the tax system.

If you buy to let privately, you no longer get 40% tax relief on your mortgage payments. The new system means you get a 20% tax credit on the tax you pay instead, which could mean you end up paying a lot more in tax. If you buy the property through a limited company, you would only have to pay the 19% corporate tax. Additionally, mortgage payments could be claimed as a business expense, so you would not be taxed on the money earned that pays the mortgage interest.

Understanding Market Rates & Repayment Terms

It’s also easier to protect yourself if you set it up through a limited company. This is because the company is responsible for the properties, rather than you. This means if you cannot make the payments on the property, you would only lose what you invested in the company.

However, there are some negatives to setting up a limited company to manage your buy to lets. First of all, there are normally less lenders that are willing to lend to limited companies. This can make it much more difficult for you to find finance to buy the property. Secondly, there can be substantial extra costs involved. These may include corporation tax, filing accounts at Companies House, and sometimes accountants fees.

How do you get started?

The first step is to speak to a financial adviser and get your finances in order. By doing this, you can figure out how much you can actually afford to invest in properties. Additionally, a financial adviser can help you figure out how much money you could make from the property, and whether it is a wise investment. Once you have your finances sorted you should speak to a mortgage broker to see what offers are available to you.

From there you need to find a property you can afford. This could take some time and it isn’t a decision you should rush into. Make sure the property is right for you and for what you’re aiming to do. Additionally, it could take a while from when you make the offer to when you actually own the property. You should allow a few months for this to happen.

Once you own the property you should take out insurance. Check the terms and conditions to see if the insurance suits your needs, and don’t be afraid to ask for advice from people who may be more knowledgeable than you. Your insurance should cover costs such as loss of rent, damage and injuries to tenants.

Lending Considerations & Next Steps

From here it’s about filling the property. How you find tenants is up to you. You could find them privately, or you could go through an agency. But, even if you are renting to friends and family, make sure that you have a legally binding contract in place to make sure everyone is holding up their end of the deal.

You may think that would be the end of it, but you will still have to keep reviewing your mortgage at the end of your current deal. It can often save you a lot of money to change your mortgage deal regularly. You will also have to carry out maintenance on the property to keep the property livable.

If you’re not sure whether buy to let properties are the best investment for you, check out the “Investing” page to find some alternatives that might be more suited to what you’re looking for.

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Promise Money is an independent credit broker authorised and regulated by the Financial Conduct Authority (FRN 681423). Our experienced team reviews your specific circumstances to secure optimal terms across 90+ UK lenders.