Rules of Buy-to-Let Mortgage: Common Questions for Landlords

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The buy-to-let market in the UK is flourishing, with increasing rents and high demand. Landlords are considering portfolio expansion, and tenants are facing record-high rents. To assist investors in navigating this market, we’ve compiled essential questions for buy-to-let landlords to contemplate before taking action.

1. Where are Buy-to-Let investors buying today?

Buy-to-let landlords are directing their investments towards major cities across the United Kingdom. Analyzing areas with a high concentration of landlords who have owned properties for less than a year and obtained landlord insurance in 2021, Simply Business identified London as the top choice for new buy-to-let investors. Following London, popular cities for such investments include Birmingham, Manchester, Liverpool, and Glasgow.

Furthermore, the horizon holds significant potential for increased investment as new geographical hotspots emerge. A substantial 74% of surveyed landlords, as per Handelsbanken, express their intentions to maintain or expand their existing property portfolios. Notably, landlords purchased more properties than they sold during the first quarter of 2022, marking the first time this has occurred in six years.

Certain cities are poised to benefit significantly from this heightened demand. Birmingham anticipates substantial property price increases, while Leeds currently boasts the highest number of student properties in the UK. Liverpool’s waterfront area has also become a prominent investment hub following extensive regeneration efforts.

2. What is the Current Count of Buy-to-Let Landlords?

In England, there is an estimated figure of 2.3 million landlords. The private rented sector in England accommodates approximately 4.4 million households, providing homes for over 11 million individuals. Wales, on the other hand, is believed to have around 90,000 landlords.

Projections suggest that these numbers will experience an upward trajectory in the forthcoming years. The UK’s private rental sector is poised for a potential growth of 6.5% by 2025. This growth could result in the total number of privately rented residences reaching approximately 5.8 million.

3. What Expenses Do Buy-to-Let Landlords Incur?

While buy-to-let investments offer potential profits, they come with associated costs that must be considered. These encompass various setup expenses, including purchase costs, stamp duty fees, legal and conveyancing charges, mortgage and valuation expenditures, and potential refurbishment outlays.

The precise expenses involved can vary considerably, influenced by factors such as the property’s value, location, and other variables. In addition to initial costs, investors must account for ongoing expenses. These encompass management fees, taxes, service charges, insurance, the possibility of vacant periods, and more. The ongoing expenditure varies, but collectively, maintenance in the UK rental sector reaches nearly £30 billion annually, as per Help me Fix.

4. What Buy-to-Let Mortgage Fits My Budget?

Investors considering buy-to-let mortgages must primarily consider their affordability based on their deposit size. The maximum borrowing capacity will also hinge on anticipated rental income.

Lenders typically require rental income to surpass the mortgage payment by 25-30%. A deposit of at least 20-25% of the property’s value is generally necessary. A larger deposit often secures a more favourable interest rate. The loan term, typically 25 years for buy-to-let mortgages, also dictates monthly repayments.

While rental income and deposit size are critical factors, lenders also scrutinize the investor’s financial background, including income, savings, and credit history. To estimate your potential affordability, utilize our complimentary buy-to-let mortgage calculator.

5. What’s the Maintenance Standard for Rental Properties?

Landlords are obliged to maintain their properties meticulously for their tenants. Furthermore, regulations in this area are becoming increasingly stringent. Presently, buy-to-let landlords must ensure their properties are safe, free from health hazards, maintain all gas and electrical equipment safely, and furnish an Energy Performance Certificate (EPC) for the property.

Various legislative acts are in place to ensure tenant safety and security. These include the Fitness for Human Habitation Act, the Landlord and Tenant Act, and The Electrical Safety Standards in the Private Rented Sector (England) Regulations, among others. Compliance with these standards is mandatory for buy-to-let landlords.

New Minimum Energy Efficiency Standards will be implemented in the coming years, while a Renters Reform Bill is anticipated to safeguard tenants against substandard homes and unscrupulous practices. Given the elevated standards, landlords should strive to maintain their properties to the highest quality, as non-compliance may result in severe penalties.

It’s important to note that this responsibility shouldn’t be seen as a burden. Surveys indicate that tenants are willing to pay higher rents for environmentally friendly homes. Consequently, the costs of property improvements can potentially be offset by increased rental income.

6. How Much of Your Rental Income is Taxable?

Rental income is subject to income tax, but buy-to-let landlords can benefit from various allowances before incurring any tax liability. Rent-a-room relief may apply to the initial £7,500 of income generated from renting a room in a primary residence. Additionally, a property allowance of £1,000 is available to individuals receiving property income. However, this allowance cannot be used concurrently with the rent-a-room scheme.

Moreover, everyone is entitled to a standard personal allowance of £12,570 before any income tax is applicable, regardless of the source of income, whether it’s wages, pensions, rental income, or others. Once these allowances are accounted for, income tax is applied on a tapered scale.

Earnings falling between £12,571 and £50,270 are subject to the basic rate of 20% tax. Income within the range of £50,271 to £125,140 incurs the higher rate of 40%, while any income exceeding £125,140 is taxed at 45%. It’s crucial for buy-to-let landlords to understand that income tax is calculated after the deduction of expenses and allowances. Their income primarily comprises rent, but it also includes payments from tenants for services typically provided by a landlord, such as utility bills or property repair arrangements.

For landlords with multiple properties, they can aggregate all their rental receipts and expenses. Income tax payments for landlords are typically handled through a self-assessment tax return. In situations where calculations become complex, accountants can provide valuable assistance.

7. Is Landlord Insurance Necessary for Buy-to-Let Investors?

While there is no legal requirement mandating buy-to-let landlord insurance, it is highly recommended for investors to consider this type of coverage. Having landlord insurance can offer valuable peace of mind when unforeseen issues arise.

There are various insurance options to take into account. Landlord buildings and contents insurance covers property damage and stolen contents. Loss of rent insurance safeguards rental income in situations where a property becomes uninhabitable due to unexpected disasters, such as a fire.

Property owners’ liability insurance provides protection against compensation claims if accidents are attributed to the landlord’s responsibility. For example, it could cover an incident where a slate tile falls from a roof and damages a tenant’s car. Additionally, commercial legal protection may safeguard landlords from costly legal disputes, and employers’ liability insurance becomes necessary if landlords employ individuals to work on their property.

Considering the extensive range of coverage options available, it is advisable for landlords to compare insurance quotes on platforms like MoneySuperMarket or Compare the Market to find the most suitable coverage for their needs.

8. Is it Feasible for Landlords to Sell a Property with Tenants in Residence?

Indeed, it is entirely feasible for landlords to sell a property while tenants are in situ, meaning the tenants continue to reside in the property even as ownership transfers. Landlords have several avenues to pursue when selling properties with existing tenants, including utilizing estate agents, participating in auctions, or engaging with home buying companies, among other options.

As stated by the National Residential Landlord Association, selling with tenants still in occupancy can offer numerous advantages for landlords. It can ensure consistent rental yields for potential purchasers, streamline the process, and minimize disruption for the tenants.