The Finance Blog

Buy to let schemes have become increasingly popular in the last few years and many mortgage lenders are now more than happy to finance a buy to let mortgage on most sound investment properties. This is due mainly to an increasing number of people wishing to take advantage of the continuing rise in property prices and the shortage of property for rent in the private sector.

To the potential buy to let investor, the prospect of rental income and a possible capital gain on disposal of the property is an extremely enticing one. This factor coupled with poor stock market performance in recent years has added to the property investment boom.

The fierce competition in the marketplace has now meant that the rates have become almost comparable to that of owner occupier mortgages. Traditionally interest rates have been higher for buy to let schemes and although this is still the case; the gap has significantly reduced in recent years making these schemes evermore viable for investors. A buy to let mortgage presents a greater risk to the lender because:

# There is no guarantee as to the consistent availability of tenants. Any periods during which no rental income is being received will affect the borrower’s ability to keep up the monthly repayments.

# The borrower may adapt a different attitude to the buy to let mortgage than if the property were his own.

# The value and saleability of the property may be adversely affected if it is badly treated by tenants and not maintained properly by the landlord/borrower.

Many buy to let mortgages are now available on a fixed or discounted rate. The terms and conditions of the mortgage will be similar to those of a conventional mortgage. They will usually contain a lender’s arrangement fee and an early repayment charge.

The main difference when applying for a buy to let mortgage, to that of a conventional mortgage, is the method of deciding suitable affordability/deciding how much to lend the applicant. The amount of the permitted advance is usually calculated on the basis of the expected monthly rental income being around 125% of the monthly payment of the loan – This is as opposed to using income multiples.

It is possible to arrange buy to let mortgages for up to 80% of the property value. The investor must first ensure that the rental income would cover the mortgage repayments and also the running costs.

The lender will ensure that a suitable form of tenancy agreement is used so that it is not prevented from obtaining a possession order in the event of default.

Potential buy to let investors will need to consider the following points:

# The location of the property. This is a very important consideration as different areas will have different demands for rental property. There are areas around the country where there is an abundance of property for rent, and not enough potential tenants to match the supply. On the flip side of course, there are hotspots around the country with limited rental properties available, which could produce a higher rental yield by investing there.

# The type of property. Many investors believe that one bedroom flats are easier to rent out than two bedroom flats. They will appeal to a range of tenants from couples to single professionals. It is important in this case to research the different areas to see where the demand lies.

# Property management. Often buy to let investors will use the services of a letting agent. The services of a letting agent will include sourcing and qualifying tenants along with the maintenance of the property. The letting agents will charge a fee for there services and this must be taken into account when working out the rental yield. The fee is usually worked out as a percentage of the rental income.

# The type of tenancy. An assured short-hold tenancy is the most effective lease. This will allow the landlord the right to take possession of the property at the end of the lease.

Along with the initial planning requirements, it is also necessary to consider the potential disadvantages associated with buy to let investment:

# The quality of the tenant can never be guaranteed.
# The availability of tenants again, cannot be guaranteed.
# House prices can fall as well as rise.
# Regular investment must be made as fixtures and fittings will be subject to wear and tear.
# Property is not a liquid asset. If the investor wishes to realise his capital, this cannot be done without first selling it.

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