If you’re funding your purchase with a mortgage, you will still need to find a deposit from elsewhere. A typical Buy to Let mortgage is currently available at a maximum of 75% loan-to-value, so it’s likely you will need to fund a quarter of the property value. (It is possible to get a Buy to Let mortgage with only a 20% or even 15% deposit but these are much stricter in criteria and with notably higher rates).
Mortgage fees
Lender Application Fee – lenders can charge as much as 3% of the amount borrowed. It can usually be added to your mortgage, which means you will pay interest on it, but this can normally be offset against your tax liability.
Valuation and Survey Fees – lenders will require a basic survey to confirm the valuation of the property. When purchasing a property you may wish to invest in a more detailed survey to find out more about the property’s coniditon and any likely repair costs.
Our Fee – we charge a fee of £399 upon receipt of a suitable mortgage offer for you. If we can’t get you a mortgage for any reason, or you withdraw before that point, we won’t charge you a penny.
Legal Fees and Stamp Duty / LBBT
When purchasing any property there will be legal costs for the necessary conveyancing work in taking and registering legal ownership. Depending on the value of the property you will have to pay stamp duty (threshold at time of writing is £125,000 in England & wales and £145,000 in Scotland). Even when just remortgaging there may be legal costs for the transfer of the security between lenders (sometimes lenders will cover this). Since April 2016 an additional 3% stamp duty / LBBT is applied to property transactions where this is not the only property you own.
Preparing your property for rent
Depending on the condition of the property you intend to Buy to Let, you may have to do structural or decorative work. You’ll also have to budget for furniture and appliances if you intend to let your property furnished.
Your mortgage payments are likely to be your largest ongoing cost. The interest paid is generally deductible for tax purposes. To confirm the viability and affordability of the mortgage lenders will want to see the rental income you earn easily covers your mortgage commitment.
They do this by calculating ‘rental cover’, with most lenders looking for rental income to be at least 125% of the interest payable at an assumed interest rate of between 5% and 6%. This is to provide comfort that the rent provides for the property’s running costs and a buffer against short periods where the property may be empty.
Property related costs
Property maintenance
Costs of repairs and maintaining the safety of gas and electrical appliances. Click here to find out more about your obligations.
Insurance
Specialist buildings and contents insurance for landlords is essential. In addition, some insurers will also provide rent guarantee insurance. Your Buy to Let mortgage broker can provide advice and competitive quotes for you.
Service charges and ground rents
Leasehold properties will incur such charges on a monthly, quarterly or annual basis. If your charge includes buildings insurance you should check if it covers rental properties adequately.
Your tenant will normally be responsible for other property related costs such as council tax, a TV licence and utilities. The tenancy agreement should clearly set out who is responsible for each of these payments.
If you’re new to the Buy to Let market, have several properties, live some distance from your property or you have other demands on your time, it could make sense to use a reputable letting agent. Naturally the fees or commission you pay to an agent will eat into your profit, but it may save you a great deal of trouble.
What do they do?
An agent can be a great source of advice, and it’s worthwhile speaking to local agents who know your area before you buy. A good letting agent will market your property, select tenants, take up references and credit checks, compile inventories and tenancy agreements, collect rent and deposits, and generally inspect and manage the property.
What do they cost?
Typical letting agent charges are around 10–15% of the monthly rental. In addition there can be a one-off set up fee. These charges vary from agent to agent, so it may be worth shopping around.
Income & Tax
Tax on Rental PropertyYou will have to declare rental income on your tax return and as such should keep records of rental payments received and any associated expenditure for the rental property. Many of our clients find it easiest to maintain a separate current account for all income and expenditure relating to their rental properties.
As a result of tax legislation which begins to take effect in 2017 and is due to be fully implemented by 2020, finance costs (such as interest) will not be tax deductible but tax relief can be claimed at the basic rate.
It’s common for landlords to use an accountant to ensure HMRC are suitably informed of your situation and finances, as well as making sure that all allowable expenses are included to minimise your tax bill. Getting suitable professional advice can often pay for itself in the long run.
Sale proceeds and tax
When you decide to sell your Buy to Let property, the proceeds from the sale will be subject to capital gains tax. As calculating this tax liability is often complicated we would again recommend seeking professional advice from an accountant.