Some information on buy to let mortgages; are they right for you?

The government predicts an increase of more than 2 million UK households over the next 10 years, due mainly to an increase in EU immigrants and a trend of smaller households. This obviously leaves a good opportunity for would be buy to let landlords, especially with the better buy to let rates we are currently experiencing and the extra tenants wanting accommodation.

So, what are the requirements of buying to let? Well, the main requirement of a buy to let mortgage is that the rent value of the property can cover costs of purchasing and maintaining the household. This can include mortgage payments, letting agency fees, building maintenance, building insurance, advertising, accountancy fees, management charges and any other associated costs. For example, licenses will be required for houses with more than 3 stories and more than 5 occupants. In fact, a general requirement is that rent covers 130% of the mortgage payments.

For example, a £100,000 mortgage will require potential rent of £520 per month. This is calculated from an £80,000 mortgage (after a £20,000 deposit payment) with an assumed rate of 6%. This example would command mortgage payments of £400 per month, so add your 30% to this and you come to the previously stated £520 rent. This appears to be a fair assessment when you consider the possible periods of time without tenants on top of all the previously mentioned house costs.

Fortunately for you, Council Tax is the responsibility of the tenants once they are occupying the house. However, you will be responsible for a percentage of the area rate if the house is unoccupied for more than 6 months. This will be a smaller percentage if the house is unfurnished.

Once paying tenants are in place, you will need to inform HM Customs and Excise of your new source of income. Expect a fine of £100 if you’ve not spoken to them within a month. Once you are making money from the house then taxes of 22 to 40% will be charged on any profit. Remember this is profit and not rent received so be sure to subtract mortgage payments that don’t cover the part paying the principle (this does incur tax unfortunately), and other related outgoings from this amount.

So, with all this information at hand you have decided to go ahead and purchase your buy to let household. The next question is where to buy this house. Obviously, if you want to manage repairs and any other issues with the house yourself, it makes sense to purchase close to your home town. However, if you are using an agent then this isn’t so important and you can buy in one of the more profitable areas.

According to UCB home loans (these are the buy to let division of the Nationwide building society), the better performing areas for property investment are Colchester, Rugby, Peterborough, Swansea, Belfast and Glasgow. Also worth noting is that East London, having been less desirable of late, is now making a comeback due to the current regeneration of the area (London having secured the 2012 Olympic games).

If you decide to sell the property, then capital gains tax (CGT) will be payable, assuming the value of your household has increased.  You do have an annual allowance of £8,800 (couples can both claim this amount) and Taper relief which allows for inflation. Taper relief is a discount of 5% after the 1^st 2 years and continues to be applicable up to year 10.

With buy to let mortgages on the market for as little as 5% and more specialist buy to let lenders around, this really is a good time to consider this investment. I would suggest you search the internet to find yourself a good broker and get all the information to hand if you decide to go ahead.