You may have heard that buy-to-let is no longer a good investment now that the government is taking certain actions to level the playing field between landlords and residential owners. Well, dismiss that from your mind right now. There is still money to be made in buy-to-let. Yes, things have changed. But there are still some particularly good strategies for making money in property.
Fundamental to profitability is financing. For the average landlord, that means buy-to-let mortgages. A mortgage on a rental property is similar to a mortgage on your primary residence. The fees may be a bit higher and the terms a bit more restrictive, but a buy-to-let mortgage is still fundamentally a loan for buying a house.
If you are a new investor, here are the top five things you should know about buy-to-let mortgages:
1. Income Matters
Regardless of whether you are a professional landlord or just a working-class buyer looking to get into buy-to-let for the first time, your income matters when you apply for mortgages. While banks are free to set their own criteria within reason, the general rule says that buy-to-let borrowers have to earn at least £25,000 annually. Earn any less and you will probably have a hard time convincing a lender that you are a good risk.
2. Your Credit Matters
Next, any lender considering offering you a mortgage is going to check your credit. So yes, it matters. Lenders look at several different things. First is your overall credit score. Your credit score is a numerical representation of the likelihood that you will pay back what you borrow.
Lenders will also look at whether or not you already own a home and, if so, how much you still owe on your current mortgage. They will look at your credit card accounts, personal loans, car loans, and any other form of credit you currently have.
3. You Will Need a Down Payment
The days of obtaining buy-to-let mortgages without a down payment are long gone. Since the financial crisis, banks have required buy-to-let investors to contribute a down payment just like their counterparts buying primary residences. How much will you need? That depends on the lender.
Expect an average down payment of 25% of the property’s estimated value. This number can vary substantially, being as little as 20% or as high as 40%.
4. Lending Limits Are Strict
Every mortgage, regardless of its purpose, has to be assessed in terms of how much the bank is willing to lend as compared to the value of the property. The only difference with buy-to-let mortgages is how value is assessed. This could make a big difference for you.
In a traditional mortgage, the assessed value is whatever the current sales market will bear. Rental properties are assessed on their monthly rental value instead. When applying for a mortgage, lenders generally want the monthly rental value to exceed mortgage payments by 25% to 30%.
Keep this in mind as you are searching for the best deal. If a trusted mortgage broker suggests that the sale price of a target home is too high because its rental value will not support monthly mortgage payments, don’t ignore him/her and go elsewhere. Walk away from that property unless you can get it at a better price.
5. Tax Relief is Going Away
Finally, property investors used to be able to deduct the totality of their mortgage interest payments as a business expense, thereby reducing their taxable income. As you may already know, that tax relief is going away. The government began gradually phasing out mortgage interest tax relief a couple of years ago. By 2020, it will be completely gone. It will be replaced by a flat 20% tax credit applied to 100% of your interest payments.
Buy-to-let is still a particularly good investment. Making money in property now just requires a few strategies designed to get around the new rules implemented within the last few years. With a sound investment strategy, the right financing partners, and a good selection of available properties, it is still possible to build a very lucrative buy-to-let portfolio that returns generous profits year after year.