A buy-to-let mortgage, also known as an investment mortgage, is designed for borrowers who want to buy a property to let out to a third party (e.g. tenants). The amount that the buy to let landlord receives in rent may be over and above the mortgage payments and will help to offset the management and maintenance costs of the property.
Over the past few years, more and more people have taken to investing in buy to let property as a long-term opportunity to make profitable returns, as well as a way of securing finance for their retirement plans.
There are however a few things you should do before going down the buy-to-let road.
1. Research the market
If you are new to buy-to-let, what do you know about the market? Do you know the risks, as well as the benefits.
2. Choose a good area
Good does not mean most expensive or cheapest. Good means a place where people would like to live and this can be for a variety of reasons. Where in the town has a special appeal? If in a commuter belt, where has good transport? Where are the good schools for young families? Where do the students want to live? These are a few things that have to be considered.
3. Do the maths
Before looking around properties, get a pen and paper and write down the cost of houses you are looking for and the rent you are likely to get. Traditionally buy-to-let lenders want rent to cover 125% of the mortgage repayments, although many had relaxed this in recent years. Most also looked for a 15% deposit, which protects against falling prices. But in the wake of the problems in the mortgage market many are now demanding 25% deposits, or even larger, for rates considerably above residential mortgage deals. The best rate buy-to-let mortgages also come with large arrangement fees.
4. Will your investment work out?
What will happen if the property sits empty for a month or two?
Make sure you know how much the mortgage repayments will be.
If you use an agent, will they pay you rent even if the house is empty?
5. Think about your target tenant
Instead of imagining whether you would like to live in your investment property, put yourself in the shoes of your target tenant. Who are they and what do they want? If they are students, it needs to be easy to clean and comfortable but not luxurious. If they are young professionals it should be modern and stylish but not overbearing. If it is a family they will have plenty of their own belongings and need a blank canvas. It is also possible to take out an insurance policy against your tenant failing to pay the rent, usually known as rent guarantee insurance. This can cost as little as £50, and is available as a standalone product from a specialist provider, or as part of a wider landlord insurance policy.
6. Insurance
As landlords effectively use their property as an extra source of income, seeking out insurance specifically designed for landlords in order to protect their investment is essential. for more information on buy-to-let insurance please click here.