There are some important decisions you need to make when deciding to buy a property to let, but we can guide you smoothly through everything. It's different for everyone, so here's a really simple guide to work out what's best for you:
Market, regulation and mortgages
Being a landlord can be a great way to increase your income. And in order to make it as profitable as possible, it's vital to get clear advice from a professional mortgage adviser. That's where we can help. We know the latest UK legislation and regulation inside out and can advise you on every detail.
Being confident you can afford it
Lenders traditionally calculate how much you can borrow by looking at the property's value and the expected rental income.
It's standard practice to build in a buffer too. This allows for hidden costs such as the property sometimes being empty, paying estate agency fees and spending on maintenance. It is calculated by using what's known as the interest coverage ratio (ICR). The ICR determines the amount the lender would like the rental income to be, to cover the mortgage and other costs.
Recent regulation changes mean these calculations have got stricter. Lenders will also ‘stress-test' the mortgage, to make sure that an increase in interest rates won't cause any problems and you will still make a profit. The minimum stress test rate is either 5.5%, or 2% above the actual mortgage rate ‐ whichever is higher.
Here's an example based on a £200,000 mortgage, using a typical ICR of 145% of mortgage interest and stress testing using an interest rate of 5.5%. The minimum rent required works out at £1,329 per month.
Taking personal income into account
This is known as income top-slicing. Some lenders will factor in your personal income if the stress-tested monthly rental calculation explained above falls short. They will look at how much you earn compared to all you spend, including your residential mortgage, household expenditure and rental property costs.
If you have extra income after covering all your outgoings, these lenders will combine it with expected rent to calculate the maximum you can borrow.
Maintaining or building your property portfolio
If you already own 4 or more properties, or have the ambition to build your portfolio, there are now additional regulatory requirements for lenders to factor in to their assessments. The regulation is not prescriptive but some examples include the lender’s relationship with the borrower, how much experience the borrower has as a landlord and a view of the borrower’s overall property portfolio.
We have many clients who are classed as ‘portfolio landlords' and have expertise in helping clients refinance and build their property portfolios, with strong relationships with all the key lenders in this market.
Stamp Duty Land Tax (SDLT)
SDLT is tax you pay when you buy a property. There is a standard calculation when you buy your main home, which goes up the more expensive it is. The same applies when buying further properties, but includes an additional 3% rise.
You need to pay this supplement whether it's a second home, a new home if planning to rent out your current one (known as ‘let to buy'), or a BTL purchase, even if you're living in rented accommodation yourself.
You can't avoid the 3% by saying you own one property and having your spouse buy the second in their name. You and your spouse are considered to be one ‘unit'.
Stamp Duty Land Tax Examples
You are liable to pay tax on income earned from rental property. This is income tax if it's a personal purchase, or corporation tax if you own it through a limited company. The amount depends on rental income, mortgage interest and other tax-deductible costs.
Should I buy in my own name, or set up a limited company?
Tax relief affects your decision on this. Between now and 2020, the amount of tax relief for BTL landlords will gradually change until the entire mortgage payment only attracts the basic rate (currently 20%). Here's a summary of how the transition will happen:
Tax Relief Examples
||Tax relief @ highest tax rate
||Tax relief @ basic rate (20%)
|Up to March 2017
|April 2017 to March 2018
|April 2018 to March 2019
|April 2019 to March 2020
|From April 2020
What does that mean for me?
Buying a property in your own name
These changes will not affect you if you are a basic rate tax payer and will remain one once all taxable income including your rent has been accounted for.
You will pay more income tax under the new rules if you are a higher or additional rate tax payer, or will become one once your rental income is accounted for. This will mean either reduced profit, or potentially a net loss after tax.
Buying a property via a limited company (special purpose vehicle or ‘SPV')
This option can be more tax efficient for higher and upper rate tax payers. However, remember that being a limited company comes with other responsibilities. You will be a company director and need to abide by the Companies Act 2006, there are likely to be additional admin time and costs involved, and professional fees may be higher.
What does this mean for my mortgage?
At the moment a few lenders will consider offering a mortgage on a limited company basis, and their interest rates and fees will typically be higher than what they offer to personal landlords.
Whether it ultimately works out cost effective for you depends on your income, mortgage rates, and fees, along with capital gains tax, inheritance tax and income from dividends.
It's important to get professional tax advice on this before making any decisions about purchasing your BTL.
Your responsibilities as a landlord
It's up to you to follow legislation, including regular inspections and maintaining tenants' rights. You must handle repairs and maintenance, rent collection, tax payments and other legal requirements correctly. Items to keep up-to-date include:
- Annual gas safety inspection
- Energy Performance Certificate
- Property and landlord insurance
- Liability insurance
You can either manage everything yourself or hire professionals to take care of it for you. For example, you can avoid all the hassle of day-to-day management by taking on a fully managed service from your letting agent. Our sister company Foxtons can do exactly that for you.
Many landlords use an accountant. It's an additional cost, but they can often help you reduce the tax you need to pay, saving you money in the long run. Ideally you want someone who is a specialist in property tax and has experience advising landlords.