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Financial Considerations for a Buy to Let investment
If you are thinking about purchasing a property for an investment, you’ll need to think about how you will afford to purchase the property. For example, will you need a Buy to Let mortgage in order to raise the capital? And will you be able to afford the additional costs involved with purchasing a rental property?
Below, we discuss some of the financial considerations. If you have any questions about what type of Buy to Let mortgage you should choose, then contact an adviser from Your Mortgage Expert. We will take the time to discuss all your options.
What type of Buy to Let mortgage – Interest Only or Repayment?
First things first, you need to decide whether you want a repayment or interest only mortgage.
- Repayment – With a repayment mortgage, you are repaying the capital borrowed as well as the interest. This means that by the end of the full mortgage term the mortgage will be repaid, as long as you do not change this at a later date and don’t miss any payment.
- Interest only – With Interest Only, you only pay back the interest and not the capital borrowed. Interest Only generally means your monthly mortgage payment will be lower, as you’re only paying the interest and not the capital back. This means you may be left with more disposable cash during the mortgage term. However, at the end of the full mortgage term, you will still owe the initial capital borrowed which will need to be repaid.
Fixed or Variable rate mortgage
The next financial consideration for a Buy to Let mortgage investment, is should you go for a fixed or variable rate. Many investors will want to opt for the certainty and stability of a fixed rate. But then again, variable rate mortgages can also be attractive. Below we have discussed some of the pros and cons of each type of rate to help you choose what type of Buy to Let mortgage.
- Fixed rate – Here, your mortgage repayments are fixed and won’t change month to month. Regardless of what happens to interest rates, your mortgage payments will stay the same whether you fix for two, three, five years etc. Effectively, a fixed mortgage acts as an insurance policy against interest rates going up, therefore you tend to find that fixed rate mortgages have a higher rate as you pay a bit more for the reassurance.
- Standard Variable Rates (SVRs) – A Standard Variable Rate tends to follow the Bank of England rate closely but not exactly. For instance, if the Bank rate is dropped to 0.25%, your SVR might only drop 0.2%. However, when the Bank rate goes up, they often increase it by the full amount. More often than not, you move onto an SVR once your fixed rate term has come to an end.
- Trackers – A Tracker mortgage will track the Bank rate exactly. This means that whatever interest rate the Bank of England sets, this is the interest rate that you’ll receive on your mortgage. It’s common to have a tracker mortgage for a few years and then you’ll drop onto an SVR after this period comes to an end. There are also some tracker mortgages that follow Libor which is a rate set by the banks themselves.
- Discount Rates – As stated in the name, discount rate mortgages offer a discount off the standard variable rate (SVR). The discount period can be for a short period of time. For example two or three years, or it would be the entire term of the mortgage, depending on the deal.
There are other mortgage types to choose from, but these are the most recognised ones. One of our mortgage advisers will be able to discuss all the different options with you.
What costs, fees and taxes will you pay?
Before you go ahead and dive into the world of Buy to Let, it’s important to know that you need more than just the mortgage and deposit in order to have a smooth experience of being a landlord. Below we have talked about some of the most common costs involved with property investment.
- Arrangement fee – Some mortgages come with a product fee, which is normally larger than on residential mortgages. This can either be paid upfront or tagged onto the cost of your mortgage. There can sometimes also be an administration charge made by the lender for arranging the credit of your mortgage.
- Stamp Duty – If the property you’re investing in is over a certain price, you’ll have to pay a lump-sum tax known as Stamp Duty Land Tax (SDLT) in England and Northern Ireland. The price you’ll pay will vary on the amount you paid for the property. This price will also vary depending on whether you already own a property in the UK. To find out more about the Stamp Duty charges, please read our article on our website.
- Legal fees – Your solicitor will charge a fee for their services, which includes handling the contracts, documentation and searches amongst other things.
- Valuation – Many lenders will want to carry out a standard mortgage valuation which you may have to pay for. However, you can look to upgrade to a structural survey or a homebuyers survey report for an additional cost, if you wish.
- Insurance – Buildings insurance is a must, and if you’re furnishing the property then you’ll no doubt want contents insurance too. Just remember that it’s a landlord’s insurance policy you’ll need rather than a residential policy.
How can Your Mortgage Expert help?
We understand that no two mortgages are the same and our knowledge and experience means we’re in a great position to help. It’s advisable to sit down and run through your finances so that you can compare the cost you’re going to pay for the property, against the rent you’re likely to take in from the tenants. A mortgage adviser could talk you through this so you have a clear idea of whether you can comfortably afford the mortgage on your own.
When you’re ready to apply for your mortgage, our specialist Buy to Let mortgage advisers will be able to arrange an appointment that easily fits around you, whether that’s face to face or over the phone.
Searching the market yourself can be time-consuming. But with our help, we can search thousands of mortgages, including exclusive deals and lenders that you wouldn’t otherwise have access to. We have regular contact with a wide range of lenders, some of whom you may not even know exist! With our help, you won’t have to search or contact each individual lender in order to compare the mortgage terms and rates; we’ll do all that for you.
Contact us to find out more about how we can help you decide what type of Buy to Let mortgage you should choose. We don’t charge for an initial consultation, so by speaking with us for mortgage advice, you won’t be under any obligation.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Your property may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 2% but a typical fee is 0.6% of the amount borrowed.
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Andrew and Helen, Armed Forces Mortgage Customers from Salisbury
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Fiona and Graham, Armed Forces Mortgage Customers from Wilton
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