November 15, 2023 4:31 pm

Insert Lead Generation
Nikka Sulton

If you’re considering buy-to-let, it’s crucial to grasp how it functions, along with the associated options and hurdles tied to a buy-to-let mortgage. 

The buy-to-let arena has turned complex for investors due to recent government changes. Even seasoned landlords face uncertainty. Tenant demand is soaring, and banks are eager to lend once more. Combine this with rising rents and a sluggish housing market, and it’s an ideal time to reconsider a Buy-to-Let investment. Investing is the key here, putting your capital to work for maximum returns. Whether you seek monthly rental income or a long-term investment, avoid common mistakes that can jeopardize your Buy-to-Let venture.

Investing in buy-to-let properties can still offer substantial profits, delivering strong returns and capital growth potential in many regions across the UK. However, it’s important to note that this venture isn’t without its challenges, especially if you choose to manage your property portfolio independently.

As a landlord, it’s crucial to possess the correct knowledge, a well-thought-out strategy, and a long-term plan before taking any action. In partnership with Arbuthnot Latham, a private and commercial bank, we delve into the key aspects that landlords must get right to sidestep stress, save valuable time, and protect their financial interests in the months and years ahead.


What is a buy-to-let mortgage?

A buy-to-let mortgage is designed specifically for properties intended for renting. If you plan to rent out your property, you need this type of mortgage. It shares similarities with a standard mortgage, where you borrow a significant amount for a fixed period. However, since you won’t reside in the property, there are key distinctions to consider.


How do buy-to-let mortgages work?

Most buy-to-let mortgages operate on an interest-only basis. This means you’ll only cover the loan’s interest each month, not the capital. While it lowers monthly expenses, you must plan to repay the loan or refinance it by the end of the term.


Buy-to-let mortgages share similarities with regular mortgages but come with notable distinctions:

  • Fees are typically higher.
  • Interest rates tend to be elevated.
  • The minimum deposit usually stands at 25% of the property’s value, although it can vary (20-40%).
  • Most buy-to-let mortgages follow an interest-only structure, where you pay monthly interest but not the principal amount.
  • The full loan is repaid at the mortgage term’s end. Repayment options are also available.
  • The majority of buy-to-let lending falls outside the Financial Conduct Authority’s (FCA) regulatory scope. However, exceptions exist, such as when letting to close family members. These are known as consumer buy-to-let mortgages and adhere to strict affordability rules similar to residential mortgages.
  • Activities related to advising, arranging, lending, and administering consumer buy-to-let mortgages are regulated by the FCA under the same laws as residential mortgages.


Who can get a buy-to-let mortgage?

To secure a buy-to-let mortgage, lenders often impose specific conditions that vary between providers. These conditions might include:

  • Ownership of your primary residence, either mortgage-free or with an outstanding mortgage.
  • A solid credit history and manageable existing debts, like credit card balances.
  • Proof of separate income, typically exceeding £25,000 annually, apart from rental earnings.
  • Age restrictions, usually around 75 years, although some lenders may set lower limits.
  • A loan-to-value (LTV) ratio requirement, often at least 75%, necessitating a minimum 25% deposit.
  • Borrowing limits determined by your rental income, which should be at least 125% of your mortgage payments.


How much can you borrow for buy-to-let mortgages?

The maximum borrowing amount is tied to your expected rental income. Lenders aim for your property’s rental income to not only cover the mortgage payments but also provide a surplus.

Typically, lenders seek rental income that’s 25–30% more than your mortgage payment. If the property’s rental valuation falls short, it might affect the required loan-to-value (LTV), necessitating a larger deposit. To estimate potential rent, consult local letting agents or online rental listings for rates on similar properties.


How much deposit do I need for a buy-to-let mortgage?

To get an investment property mortgage, you’ll usually need a deposit of at least 20-25% of the property’s value.

Like regular home mortgages, a larger upfront deposit typically means better interest rates. The best buy-to-let deals are usually for investors with 40% or more to put down.

Lenders consider your current property portfolio and past buy-to-let borrowing and repayment history in their affordability assessment.


Buy-to-let and tax


1. Capital Gains Tax

For individuals in the basic tax bracket, selling second properties like buy-to-let incurs an 18% Capital Gains Tax (CGT). Higher or additional tax bracket individuals face a 28% CGT rate. In contrast, other assets have a basic CGT rate of 10% and a higher rate of 20%.

If you make a profit selling a buy-to-let property, CGT applies once the gain exceeds the annual threshold, set at £6,000 for the 2023/24 tax year. Couples co-owning assets can combine this allowance, potentially allowing gains of up to £12,000 (in 2023/24) during this tax year.

To reduce CGT, you can deduct expenses like Stamp Duty, solicitor fees, estate agent fees, or losses from selling a buy-to-let property in a previous tax year from any capital gains.

Any property sale profit must be reported to HMRC, and the applicable tax settled within 30 days. The capital gain is integrated into your overall income and taxed at your marginal rate (either 18% or 28%). Importantly, you can’t carry forward or backward any unused CGT annual allowance, so it must be used in the current tax year.


2. Income Tax

Rental income is taxable and should be reported on your Self Assessment tax return for the relevant tax year. In England, Wales, and Northern Ireland, the tax rates range from 20%, 40%, to 45%, depending on your Income Tax band. In Scotland, rates may be 19%, 20%, 21%, 42%, or 47%.

You can deduct certain allowable expenses like letting agent fees, property maintenance, and Council Tax from your rental income to lower your tax liability. Tax applies to rental income only if it exceeds your personal allowance for the tax year.


3. Mortgage Interest Tax Relief

Landlords can no longer deduct mortgage interest from rental income to reduce their tax liability. Instead, a tax credit equal to 20% of the mortgage interest component is provided. This change may lead to a higher-than-expected tax burden.


Buy-to-Let Investment Landlord Mistakes:

While opportunities exist, it’s crucial for landlords to avoid these common buy-to-let investment mistakes:


1. Avoid Overspending for Minimal Returns

“Assess Affordability: A Wise Approach to Buy-to-Let Investment”

Before leaping into buy-to-let, calculate your financial limits, factoring in all landlord costs. Avoid financial strain, stay realistic, and seek professional mortgage advice, considering future interest rate increases. Unexpected expenses, such as boiler repairs or service charges, can emerge; prepare for them without compromising your investment’s profitability.

Additionally, rental income fluctuations, tenant arrears, or vacant periods might occur. Develop strategies to withstand lean times and ensure your investment remains resilient.


2. Securing Your Investment’s Future: The Essential ‘Futureproofing’

Many landlords find themselves in a tricky situation because they hastily jump on an enticing property deal without due diligence. Remember the sage advice: haste makes waste. By dedicating some time to local research, you can uncover the reasons behind the property’s attractive price tag. Is the location ideal? Are there any security concerns? Is a new motorway scheduled to cut through the nearby nature reserve? Could there be a supermarket popping up at the end of the street? Conducting a bit of investigation into the area’s dynamics doesn’t require a genius. It’s simply a matter of staying informed about local developments. After all, a property offered at an unusually low price typically has underlying causes. Just ensure that unforeseen external factors won’t negatively impact your investment.


3. Buy for your tenants, not yourself.

Tap into your logical side, channel your inner Vulcan, and make a property investment that promises a robust return. This is the key: Avoid the common pitfall of purchasing a property solely based on personal preference, which may not align with the needs of your intended tenants. Also, exercise caution when it comes to the interior decor and fittings. Opt for neutral colours and furnishings, keeping your prospective tenants in mind throughout the process.


4. Factor in unforeseen costs

In addition to mortgage payments, various expenses are linked to a rental property, encompassing insurance, maintenance, and compliance with regulations. These regulations include energy efficiency standards, electrical safety, and gas safety certification.

It’s prudent to maintain a contingency fund to address these costs. Similar to preparing for void periods, you might contemplate bolstering this fund by retaining any excess rent in your bank account.


5. Calculating Rental Yield

This should be part of your initial research. Finding a property in an area that offers a strong return on investment is crucial. You might consider a property in a desirable yet affordable area that needs some renovation. If you go this route, ensure effective budgeting to maximize your investment.

Learn about property selling and rental prices in those areas and compare them to other properties within a 10-mile radius. Overpaying for a property with slow appreciation is unwise, especially if you’re renting it for less than your mortgage. Thorough research is essential.


6. Pick the right location

One of the most significant blunders landlords can commit is selecting an inappropriate location, whether it’s an area with low tenant demand or serious issues related to anti-social behaviour.

The mantra of “location, location, location” remains as crucial as ever, perhaps even more so in light of the impact of Covid. When you’re in the process of purchasing a property for renting, it’s paramount to acquaint yourself with the area and its reputation before making an investment. This might sound like an obvious step, but due diligence is sometimes overlooked.

For instance, an area might be very upscale but also command very high rents, potentially making it unsuitable as you could face challenges in finding tenants. Take London, for instance. Despite being the largest and most popular rental market in the country, it doesn’t necessarily yield the highest returns due to the initial purchase costs. Areas on the outskirts of London and the counties surrounding it often offer better rental yields due to more affordable entry prices.

When evaluating an area, consider whether it’s appealing to prospective tenants. Is it close to green spaces, transport links, and local amenities? Does it offer reliable WiFi connectivity, or is it a WiFi dead zone? Is there a nearby university? HMOs (House of Multiple Occupancy) tend to be in high demand in student-heavy areas and places favoured by young professionals, but they might have limited appeal in family-oriented or elderly tenant-centric neighbourhoods.


Reasons why 2023 might be the best time to invest in buy-to-let: 

Here are five compelling reasons why we believe the current year presents an excellent opportunity to enter the rental market or expand your existing property portfolio:


1. A Noticeable Rental Shortage

The past few years have witnessed robust rent increases primarily due to an overwhelming demand for rental properties, significantly outpacing the available supply. Fierce competition among tenants has driven rental prices upwards, with many tenants willing to surpass the advertised rental rates to secure suitable accommodation.

Nonetheless, it remains crucial to conduct thorough research on supply and demand dynamics in your specific area. This ensures that the property you acquire not only performs well in the current market but also maintains its appeal in the long term. It’s essential to acknowledge that tenant preferences can significantly differ from one part of a town or city to another. Collaborating with local experts, like Leaders, can help guarantee the long-term viability of your buy-to-let investment.


2. A Decelerating Market Can Present Investment Opportunities

While some prospective buyers become apprehensive when property price growth starts to slow, it can actually create favourable conditions for property investors. Particularly, it provides opportunities to purchase properties at prices below their perceived market value, facilitating quicker transactions.

This situation often arises when sellers encounter challenges, such as the burden of higher mortgage rates, the necessity to access the equity tied up in their homes, relationship breakdowns, or urgent relocations due to new job opportunities. The key is to identify these “motivated sellers.”

By offering a swift and convenient transaction that helps sellers move forward, you gain leverage for negotiating a reduced selling price. Any discount you secure translates into immediate equity in the property, enhancing the property’s income potential as well.


3. Landlords Exiting the Market Create Opportunities for Immediate Cash Flow

As a result of legislative and tax adjustments that have impacted the buy-to-let sector in recent years, some landlords are opting to exit the market. However, others have merely reached the natural conclusion of their investment strategy and had intended to sell at this point.

Acquiring a property that complies with all legal requirements for letting and already has tenants in place eliminates the need for additional capital investment to make it “rent-ready.” This scenario could potentially generate rental income from the very first month of ownership.


  1. Energy-Efficient Homes Can Attract High-Quality Tenants

With the government’s ambitious target of achieving net-zero carbon emissions by 2050 and increasing emphasis on combatting climate change, especially among younger generations, properties that are energy-efficient and environmentally friendly are highly sought after by tenants.

Purchasing either a newly constructed property with cutting-edge eco systems and features already in place or a property you can renovate to include low-carbon heating and other environmentally friendly attributes can help you attract top-tier tenants who are willing to pay premium rents. Additionally, you might explore funding options to assist with the cost of these eco-friendly improvements; our energy efficiency grants article provides further insights.


  1. Anticipating Future Legislation

Following the government’s release of the long-awaited White Paper, ‘A Fairer Private Rented Sector,’ last June, which includes proposals for ensuring new tenancies meet a minimum ‘C’ EPC rating in the next few years, it’s evident that regulations governing the private rented sector will become more stringent.

Being aware of potential forthcoming changes provides you with the opportunity to acquire a property that already complies with these proposals or undertake any necessary renovations before entering the rental market.

As with any property purchase, it’s essential to ensure that your offer is financially feasible and that obtaining a mortgage won’t pose any challenges. If you’d like to discuss financing options in the current market, you can reach out to our affiliated company, Mortgage Scout, for a complimentary and obligation-free consultation.

If you have questions about investing in buy-to-let or would like to learn more about the property market in your locality, feel free to contact your nearest Leaders branch.



MORE Property blogs HERE: 

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The BRRRR Method with NO Downpayment

The BRRRR Method: A Step-by-Step Guide

Crucial BRRRR Investment Considerations

The Impact of Section 24 on Buy-to-Let Properties

Calculating BRRRR for Return of Investment

Starting a UK Property Rental Business: Step-by-Step Guide

A Guide to HMO Conversion in 2023

Is It Time to Abandon Buy-to-Let Investments?

Property Rental Licensing Requirements in the UK

Second Homes and UK Council Tax

Is an investment property considered a second home?

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