Buy To Let Mortgage Advice and Information
How does the lending criteria differ for buy to let
In the past lenders would put high rates of interest on mortgages for second properties bought by private individuals to let out. However, under the Buy to Let scheme lower rates are now available to purchase property to rent out and also under the scheme the rental income will also be considered when assessing a borrower's ability to meet mortgage payments.
Buy-to-let mortgages are subject to usual status checks and loans can be arranged for terms of between five and 45 years and for up to 85% of the value of the property.
Drewery property services can provide competitive quotes for buy to let mortgages from all leading lenders by speaking to one of our associated independent buy to let mortgage advisors. Alternatively to register your requirements or contact a member of staff for advice on buy to let.
What returns are there from letting a property
Generally the Gross returns available on buy to let properties (the rent received before taking account of cost of letting - such as management fees, maintenance, service charges, ground rents and insurances) varies between 7% and 10%. This figure does however vary depending on other aspects such as original purchase price, deposit and market conditions. The Gross return will also generally drop by up to half for properties at the very top of the scale of values, although the right high priced properties will often show a better capital appreciation. As a rule of thumb it is advised that the gross rents should be between 130% and 150% of the monthly mortgage payment.
Other factors that should be taken into account when calculating potential return is the possibility and length of void periods (time scale property is empty between lets), any length of void periods will make a significant difference in the overall return.
Despite the large amount of negative publicity recently surrounding buy to let investments, Drewery’s have seen increases in average rents in most if not all the local areas covered and the average rental return in Britain today hovers around the 10% mark with experts predicting capital appreciation will match, if not exceed, inflation for the foreseeable future. For further information on rents achieved, returns, voids, viewings per letting, types of investment and supply and demand please view or download the ARLA Review and Index. This data provides the basis of the ARLA review and index which is supported by the ARLA Panel of Mortgage Lenders and contains data on the following areas:
- Annual Rates of Return on Buy to Let Investment
- Effect on Annual Rates of Return of Different Rates of House Price Inflation
- Differences in Annual Rates of Return for Houses and Flats
- Differences in Annual Rates of Return for Houses and Flats
- Lending Trends
What other costs will have to be considered
A number of other costs will have to be considered including letting and management fees, insurances including building, contents, rental and legal expenses cover. Other costs to consider include keeping the property maintained and in a marketable condition, service charges and ground rents if the property is Leasehold. All other costs such as utility bills, council tax and TV licence fee are the responsibility of the tenant.
Tax Implications
It is advised that you speak to a qualified accountant so to be advised of any tax implications you may have to consider. However, deductions against tax on rents received may be claimed for the costs of maintenance including insurance, cleaning, gardening, agent’s fees and other management expenses.
The original cost of furnishing any buy to let property is not allowed to be used against deduction against tax but the actual cost of subsequent replacement of furnishings may be claimed as well as a wear and tear allowance of 10% of the rent received may be deducted.
Income Tax
The rent after deducting allowable expenses will be subject to income tax at the Landlord’s highest rate. It is advised that you speak to an accountant about possible ways to minimise tax exposures however as a rule of thumb the following are allowable expenses:
- Maintenance and ground rent charges if the property is Leasehold
- Mortgage interest
- Lettings agents fees
- Landlord insurances including buildings, contents and legal and rental guarantee
- Council tax whilst the property is vacant
- Any accountant fees
- Stamp duty paid on tenancy agreement
- Any legal expenses incurred but not any related to purchase of property
- Repair and maintenance of the property and contents but not for improvement
- Water and sewer rates if charged to landlord
The inland revenue will also allow a deduction if the property is furnished. Allowable expenses may only be claimed whilst the property is let or available to be let.
Capital Gains Tax
Homeowners do not incur Capital Gains Tax when selling their own property as there is relief from the capital gains tax in respect of the principal private residence. Anyone buying an additional property that they also used to live in can choose which one they wish to be principal residence, but it is important you make the choice within 2 years of the second purchase otherwise, the inland revenue will make the decision for you. However, if one of the properties is let, it cannot be chosen as the principal private residence. As a result, whenever a property that is not the main home is sold, any rise in value, subject to indexation, is liable to capital gains tax at the taxpayer’s highest rate of tax.
Capital gains tax allowances will frequently change and if shared ownership is involved allowances could also differ. It is therefore advised that you seek the advise of a qualified accountant.
Tax Exposure In conclusion
As an investor, careful records should be kept of the following items so to minimise tax exposure:
- Purchase costs
- Stamp duty
- Cost of repair or refurbishment prior letting
- Improvements/repairs/replacements whilst let
- Costs of sale
If a qualified Managing Agent is instructed to deal with the day to day management of your property, they will be able to provide monthly/annual statements itemising income and expenditure throughout the year, which you will be able to utilise for Tax Returns.