Is Buy-to-Let Still Viable in 2023?

Nikka Sulton

Is Buy-to-Let Still Viable in 2023?

The surging popularity of serviced apartments attracts guests seeking hotel-like comforts while preserving privacy. To excel and boost profitability in this competitive landscape, it’s vital to revamp marketing strategies for your multiple properties.

For landlords, negative perspectives have emerged, driven by rising interest rates that significantly elevate mortgage costs compared to a year ago. Additionally, tax advantages have dwindled. Let’s confront these challenges proactively. Every year, both prospective property investors and current landlords ponder the ideal time to expand their portfolios. In light of the deceleration in annual price growth since the summer of 2022, does 2023 offer a promising investment opportunity?

Our analysis suggests it might, contingent on your property investment goals. Although average property values are forecasted to dip this year, this follows double-digit market growth for many properties during the pandemic, with anticipated recovery within five years. Moreover, rents have consistently risen due to constrained supply. Given the long-term nature of buy-to-let investments, subdued property price growth alongside robust rental increases could prove advantageous for both new and seasoned landlords.

Who can get a buy to let mortgage?

If you intend to lease your property, securing a buy to let mortgage is essential. Many lenders perceive buy to let mortgages as higher risk, and eligibility criteria may vary from one lender to another, encompassing the following considerations:

While not always a prerequisite, some lenders may require that you already possess a property of your own, whether fully owned or with an existing mortgage.
A sound credit history is typically expected, with a manageable level of other financial commitments, such as credit card debt.
You might need to demonstrate separate income from employment or self-employment, typically around £25,000 or more annually. Earning less than this could pose challenges with certain lenders when seeking approval for your buy to let mortgage.
Lenders often stipulate a maximum age requirement, typically around 75 years, though some may set lower age limits.
A loan-to-value ratio (LTV) limit of at least 75% is common, meaning you’ll need a minimum deposit of 25% for your bu to let mortgage.
The amount you can borrow hinges on your rental income, either current or anticipated. Lenders usually require your rental income to cover at least 125% of your mortgage repayments.

How buy to let mortgages work?

One notable distinction lies in the fact that the majority of buy to let mortgages operate on an interest-only basis. Consequently, your monthly payments solely cover the loan’s interest, leaving the principal amount untouched. While this results in lower monthly payments, you must be prepared to either settle the entire loan, sell the property, or refinance at the mortgage term’s conclusion. Essentially, you can purchase the property, generate rental income for the agreed term (e.g., 25 years), and subsequently repay the mortgage by selling the property.

Repayment mortgages, where both capital and interest are repaid in monthly instalments, are infrequent in the realm of buy to let properties. Implementing such a mortgage would necessitate charging higher rent to cover the increased monthly cost. Nonetheless, this arrangement grants flexibility at the mortgage’s end, allowing you to continue renting and retaining the full rental income or selling the property without mortgage obligations.

Another pivotal disparity between residential and buy to let mortgages pertains to the borrowing amount. In the buy to let context, your borrowing capacity is determined by the projected rental income, not your personal income. Therefore, if the property boasts size or an ideal location, you can command higher rent, consequently securing a more substantial mortgage.

The third distinction lies in the deposit requirement. Buy to let mortgages are perceived as riskier by lenders, leading to a common stipulation of a larger deposit, typically around 25% or more. Similar to standard mortgages, a larger deposit enhances the attractiveness of mortgage offers, so it’s advisable to provide the most substantial deposit possible.

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

To secure a mortgage for an investment property, you’ll typically require a deposit amounting to a minimum of 20-25% of the property’s value.

Similar to traditional residential mortgages, the rate you can access improves with a larger initial deposit. The most attractive buy to let offers are typically reserved for investors who can put down deposits of 40% or more.

Lenders, during their affordability assessment, take into account your existing property portfolio (more on this topic later) and your prior track record in obtaining and repaying buy to let financing.

CONCLUSION:

Many individuals opt for buy-to-let properties as a means of securing retirement income, utilizing their pension savings as initial deposits for this purpose.

If you’re contemplating using your pension funds to invest in buy-to-let properties, it is imperative that you consult a financial advisor beforehand. Tapping into your pension fund can carry significant consequences and may lead to tax penalties.

Is buy-to-let a worthwhile venture? Absolutely.

Is buy-to-let a dying investment? Absolutely not.

I’ve been involved in property investment for over 25 years, managing a portfolio of rental properties and continuously seeking to secure a future for my family. I recommend investing through a limited company and entrusting your rental business to a professional letting agent.