Things to consider before becoming a buy-to-let landlord

The UK population is well known for the preference of home ownership over renting. However there are millions of UK residents currently living in rented accommodation, and the properties they live in are owned by landlords.

Becoming a landlord may sound like an attractive proposition to those with the appropriate means – there is potential for capital appreciation via rising house prices, plus a continuous yield generated from the monthly rental income.

Before taking the plunge as a landlord there are a number of key considerations to take into account.

Deposit

Firstly is the deposit, which must be a minimum of 25% of the value of the property. This is more than the minimum deposit required to purchase a main residence, and means that the maximum BTL (buy-to-let) mortgage borrowing is capped at 75% of the value of the property.

Some would-be landlords are home-owners who wish to convert their existing home into a rental property when they upsize via an onward purchase. The minimum BTL deposit requirement of 25% can render this dream unachievable for some. This is because the funds that are available for the onward purchase are considerably less than would be the case if they sell their existing home to free up all their equity.

Although the maximum BTL mortgage borrowing is 75% of the value of the property, it is not necessarily always possible to borrow as much as that. The reason for this stems from the way in which lenders assess BTL mortgage affordability, which is typically calculated using the rental income that will be received.

Some lenders can also take into account the applicant’s earned income, to support higher levels of borrowing than the rental income itself supports. This means higher earners may be able to borrow the maximum 75% of the property value, despite rental income being insufficient to warrant that level of borrowing. It is worth noting that this might then reduce the borrower’s maximum mortgage affordability for their main residential mortgage – this can be the case where a rental property is not deemed to be self-servicing from a financial perspective.

The rental income itself is taxable as if it is earned income. Up until April 2017, landlords were able to deduct the interest paid on their mortgage from their rental income, bringing down their overall tax bill. This allowance was then gradually phased out and stopped altogether in April 2020.
One way that landlords can look to increase their monthly net profit is to arrange their borrowing as an interest-only mortgage. This keeps the monthly mortgage costs down, however it does mean that the mortgage debt itself is not reducing over time as would be the case with a capital-and-interest repayment mortgage. It also means that the borrower will require a lump sum of money to repay the debt at the end of the mortgage term. Lenders require the borrower to confirm their ultimate repayment strategy to support an interest-only mortgage, however selling the property is an acceptable answer.

Selling the rental property will attract Capital Gains Tax (CGT) on any gains made in comparison to the purchase price, and can therefore be a costly process. It is however possible to defer this issue because the BTL mortgage term can run to much higher age than is normally the case with a standard residential mortgage. Terms can easily run into retirement, with options to borrow up to age 85 and even beyond. This can then avoid the need to sell the property and repay the loan during the landlord’s lifetime.

Another factor to be aware of is that the interest rates and arrangement fees tend to be higher for BTL mortgages than for standard residential mortgages. Other costs to take into account are things like:

• General property maintenance cost.
• Redecorating and refurbishing.
• Void periods when tenants leave.
• The cost of sourcing and signing up new tenants to replace them.

You should be aware that not all buy-to-let mortgages are regulated by the Financial Conduct Authority (FCA). This means that if you choose to take up such a mortgage, you will not have the means of redress offered for regulated mortgage contracts in the event that you should have any complaints. Your home may be repossessed if you do not keep up with repayments on your mortgage, or other loan secured on it.