Becoming a landlord can be a lucrative business but unless you are a cash buyer, you will need a buy-to-let (BTL) mortgage and some money up front. A deposit of at least 20% is required although many lenders insist on 25%
Rental yield
An extremely important factor is that the rent you charge must be higher than your monthly mortgage repayment and this is called the gross rental yield. You can calculate this by dividing the annual rental income of the property by the purchase price and multiply by 100 to get the percentage. E.g, annual rental income is £6,000 and the property cost £100,000.
6,000 ÷ 100,000 x 100 = 6 so the rental yield is 6%.
Affordability tests
You’ll want to make a profit but it is also a regulatory requirement that lenders have to apply affordability tests. These consists of an interest cover ratio (ICR) and a stress test.
The ICR is usually between 125% and 145% of the mortgage payment covered by rental income. This means the rent you charge must be at least 25% to 45% higher than the mortgage payment.
The stress test is to ensure you can afford the mortgage payments if interest rates rise within the next five years. However, if you take out a five-year fixed rate, there is no need for the lender to use this stress test.
Interest-only mortgage
The vast majority of BTL mortgages work on an interest-only basis which means each month you pay just the interest on the loan, you don’t pay off the capital, i.e. the original cost of the property.
Taxes and other expenses
When you buy the property there will be stamp duty to pay and this is charged at 3% above residential property. There have been changes to tax rules that has made property investment a bit more challenging. You can be an individual landlord or set up as a limited company but it’s best to get advice from a tax accountant that understands the BTL market.
There are also expenses to consider such as electrical and gas safety certificates, smoke alarms, landlord insurance, Energy Performance Certificate, maintenance and repairs.
Energy Performance Certificates
All rental properties must have an Energy Performance Certificate (EPC), which indicates the energy efficiency of the property.
If you would like advice on a rental property, we’d be delighted to help. Call Greg, our experienced lettings valuer on 01282 417775
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