Financing a Buy to Let Mortgage
Having decided to get involved in the buy to let market, the first thing that needs to be considered is how this project is likely to be financed. Fortunately, there are a wide number of options available which allow potential investors a wealth of opportunities when it comes to financing the project.
Beyond a shadow of a doubt, the vast majority of buy to let investors will use a specialist form of buy to let mortgage in order to purchase their property. A buy to let mortgage has different requirements and restrictions compared with a standard residential mortgage.
In addition, the rates offered are sometimes not as competitive as those mortgages that are used specifically for residential mortgages. Do not be tempted to use a residential mortgage, as if you then let the property you are, in effect, breaking the terms of the mortgage and the lender may withdraw their financing.
A larger deposit is usually required, especially if it is your first buy to let property, as you are a "first time landlord." A deposit of around 15 to 25 percent is usually required and it will be necessary to prove to the mortgage lender that the rent will cover in the region of 125 percent of the mortgage repayments. Some companies will offer mortgages with a lesser deposit or with lesser coverage but in order to give yourself the widest range of choices when it comes to mortgage providers, it pays to be able to meet the basic criteria.
Some mortgage providers will offer services especially tailored for investors who have growing portfolios. Some providers will only finance lending for up to 5 properties, whereas others will allow any number of properties but may place a maximum total value on the portfolio. When you are starting out as a property investor, it can be difficult to consider your future needs. Nevertheless, paying attention to your requirements at this early stage can mean that you have a flexible financing structure in place from the very start.
As well as a buy to let mortgage, many investors will consider joining a property syndicate, whereby they are only required to invest a small amount of cash. By joining forces with other investors it may not be necessary to borrow any cash at all. Other alternatives include re-mortgaging the family home, which is a popular choice for investors who do not have a mortgage on their home. For those who do have a mortgage on their home, they may wish to remortgage a small amount to raise deposit funds. Short-term financing with loans and credit cards is also an option but can be costly, although it does allow for a quick release of cash.
Anyone who has purchased a property to live in is more than aware of the costs such as heating and electricity. However, there are so many additional costs involved in buy to let which absolutely must be budgeted for, as part of the project planning.
Modern tenants do, generally, require white goods to be part of the property. Therefore, an additional £1,500 should be budgeted as part of the initial setting up costs, if you are to appeal to the largest possible number of tenants.
Although your tenants will usually be responsible for costs such as council tax, water rates and utility bills including electricity and gas, it is not uncommon for landlords to include regular costs such as council tax as part of the rent. This has several advantages; tenants like the predictability of having some bills included as it allows them to budget accurately; as a landlord you are then certain that a council tax bill will have been paid. Although it is the resident tenant who is responsible for the council tax bill (unless the landlord is also resident), it may be difficult to retrieve the cash from a tenant who has moved on, leaving the landlord with a potential liability to prevent fines. A similar principle applies with water and sewerage charges and this is another bill that is often included as part of the rent.
Insurance is another ongoing cost that should be viewed as truly essential. The two main insurances that you should be maintaining are buildings’ insurance and public liability insurance. This will cover you if the property has a structural problem such as fire or flooding and will also cover you if your tenants are injured in your property and try to claim compensation from you, as the landlord.
Buy to let investors should budget for the following expenses:
10 percent of the purchase price for additional one-off expenses;
between 10 percent and 20 percent of income to an agent to manage the property on a monthly basis;
5 percent per year of income for repair and maintenance; and
7 percent of income annually for void periods.