One of the questions we are asked most is whether buy to let is a good investment?
Property has always been a hugely popular investment strategy in the UK as the potential return is two-fold.
Firstly, there is the potential for capital growth in the asset as house prices continue on a steady upward curve.
Secondly, there is the potential for a regular income through the rental return received.
As house prices have risen, so to have rental incomes and a rental yield of 5% to 10% is feasible depending on location.
Like any investment, buy to lets come with risk. The sector is currently facing the most challenging time in its history with the introduction of higher stamp duty, complex stress testing and changes to tax relief.
Even with these challenges, bricks and mortar remains a hugely popular investment opportunity with fantastic returns on offer. Key to this is finding the right property with the right mortgage.
Finding the right buy to let mortgage
Buy to let mortgages are for investment purposes and therefore considered as higher risk by lenders. The increased risk means that rates can be more expensive than a residential mortgage but there are still some very competitive options available.
A minimum deposit of 25% to 40% is likely to be required. This varies depending on the lender and rental income received from the property. The bigger the deposit, the better the rate you are likely to be offered.
Most buy to let mortgages are taken on an interest only basis as landlords look to maximise the profit from the rental return. This may leave a shortfall at the end of the term and a clear repayment strategy should be carefully considered.
Rental income / Stress Testing
One of the factors that determines how much deposit you will need is the potential rental income received. Lenders will now stress test the mortgage to ensure it is affordable in the event of interest rates rising.
To find out how much rental income a property can generate, it makes sense to speak to local lettings agents as well as checking online listings for comparable properties in the same area. Once you know your rental income, an adviser can help you to work out exactly how much you can borrow.
As a guide, your rental income should make a profit of at least 125% of your mortgage payment (on an interest only basis) plus all of the associated costs. These costs include management fees, ground rent and service charges, insurance, property maintenance and rental voids.
With so much to consider in buy to let, the need for specialist independent advice has never been greater. The sector is complicated but remains popular and is a fantastic opportunity for investors who are prepared and know their numbers.
360 Financial Services Limited is an appointed representative of New Leaf Distribution Ltd which is authorised and regulated by the Financial Conduct Authority.
Some commercial mortgages and most buy to let mortgages are not regulated by the Financial Conduct Authority.