Costs Involved
As well as the higher deposit required to secure the property, there are plenty of other costs that first-time landlords need to be aware of. These include:
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Fees: As with a residential mortgage the borrower will need to budget for broker and valuation fees, however these can be higher than the fees charged for a residential mortgage due to the more complex nature of the transaction.
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Tax: Landlords are required to pay tax on the profit from the property’s rental income. Some landlords opt to incorporate a limited company through which to purchase a property, which can have some tax benefits. Further information on working out the tax can be found here. https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income
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Early Repayment Charges (ERC) – If a landlord is planning to repay the mortgage before the end of the fixed term, then they should look for a mortgage with no early repayment charges. ERCs are common on fixed-term mortgages and usually no ERCs will be applicable on variable rate mortgages.
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Stamp Duty – When someone purchases a property, they are required to pay stamp duty which carries an additional levy. For Buy-to-Let properties, there is a 5% surcharge charge. For the latest information on stamp duty please visit the government website https://www.gov.uk/stamp-duty-land-tax
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Property furnished or unfurnished – having a furnished property may add monthly rental value, however, it will be the landlord’s responsibility to make sure furniture is supplied. fixed and replaced when needed.
Rules and Regulations
There are a number of rules and regulations that landlords must adhere to as the owner of a Buy-to-Let property. These include ensuring that a property is safe and fit for tenants to live in and protecting tenant deposits by placing them in government-backed scheme. Further regulations may apply, which we discuss later on in this guide.
Check out our handy guide on the rules and regulations that landlords need to be aware of for more information – FAQs for Landlords
Considering a location for buy-to-let property
Buy-to-Let properties can be a great investment if done correctly and location of the property can be a big influence on whether it will be a solid investment for landlords.
Things to consider:
- Rental yield.
- Price of the property. Does the purchase price represent value for money? How quickly will the asset appreciate overtime.
- Demand for rental properties in the location
- Proximity to the purchaser. Landlords are more likely to purchase in areas known to them. They may also choose to self-manage the property, so being able to attend the property could mean the rental needs to in commutable distance.
- Tenant profile – Will the location likely attract a certain type of renter. Ie family, young professional, student.
- Employment anchors, local amenities, transport links can also play a factor in when considering locations.
Research on the area you plan to buy in is important and can be done using websites such as Rightmove or Zoopla, to determine the local rental demand and average costs within the area.
Accidental Landlords
There may come a time when someone inherits the title of being a landlord unintentionally, for example, job relocation, inability to sell, inherited, etc.
If a homeowner for whatever reason does find themselves opting towards turning their property into a rental home, they must first contact their mortgage lender and make them aware of the situation.
A lender may grant a residential homeowner a ‘consent to let’ which allows them to rent out their property for a maximum of 12 months without having to make changes to the residential mortgage.
This is a short-term solution and is a good option for the homeowner should they require time to change their circumstances.
A more long-term solution for an accidental landlord could be that they switch their residential mortgage into a Buy-to-Let. It should be noted that there may be charges that come with this switch such as a lower loan to value and the rate of the mortgage may also differ from the current rate.
Selecting a letting agent
Letting agencies may be a great solution for first time landlords as they take over the everyday management of a Buy-to-Let property, enabling the landlord to divert their time and energy elsewhere.
Letting agencies may differ from one another in terms of services and the landlord will need decide on the level of service they require from their letting agent based on their available time to manage the property, the accessibility to their property and how involved they want to be in dealing with the property and tenants. The level of service is usually directly associated to the charges involved.
Having a buy-to-let company structure
Having a Buy-to-Let property under a limited company may be more efficient for some landlords. Find out some of the benefits, below:
- No tax on rental income: If the property is privately registered under the name of the landlord, their rental income is taxed. This is because any rental income received is added to the landlord’s personal income. Properties registered under a limited company may receive rental income as business profits.
- Corporation Tax – Although there is no tax on rental income for properties registered under a limited company, they are still charged for Corporation Tax which currently stands at 19%. This can go up to 25% if the company earns more than £250,000 in profit a year.
- Deducting expenses through the limited company: Private landlords are not allowed to deduct any finance costs, such as mortgage interest, from rental income, whereas those who own through a limited company can as they are considered as business expenses.
We recommend speaking with a qualified accountant as they may be able to provide details on any tax benefit or liability.
However, one thing that must be carefully considered when purchasing a Buy-to-Let property under a limited company is that landlords are not entitled to capital gains tax allowance. This means, when landlord plans to sell their property, it will be considered as a transaction by the company and not as a private individual.
Additionally, there are costs of running a limited company. This can include things from preparation of the accounts for the limited company (a legal requirement), corporation tax when profits made are taken from the business, and potentially any annual auditing.
While having a Buy-to-Let mortgage under a limited company could be more efficient for some landlords, this is not a silver bullet, and some landlords may still benefit more from buying property in their individual names. We recommend getting independent financial advice before taking any steps to incorporate a company for the purpose of purchasing BTL properties.
Getting a buy-to-let mortgage as a first-time buyer
Buy-to-Let mortgages can be tricky for first-time landlords to secure, especially if they do not already have an existing residential mortgage.
First-time landlords must ensure that they are able to meet all the requirements given by lenders before making an application. They should consider all the costs involved, regulations which could affect them, and affordability both initially, and in the long-term.
Lenders need to have confidence that a landlord will be able to repay the Buy-to-Let mortgage and will be able to cope with the day-to-day pressures of being a landlord.
For this reason, lenders tend to require a minimum income from first-time buyers so that some of the risk can be absorbed by them.
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