How to buy to let

It can help to focus on a specific type of tenant for your property. Students, families and young professionals each have different requirements for a property, and different considerations for its location. If you have the wrong property or location for your target tenants, you could struggle to rent it out successfully. And every day the property is empty, you’re losing income.

As well as choosing the right location for your target tenant, you need to consider how you’ll manage the property. If you’re doing it yourself, then ideally you’ll need the property to be close by to avoid having to travel too much. But if you’re planning on using a letting agent, you can look further afield to areas that might have a higher demand for rental property.

You might consider talking to some estate agents too –they’ll know what’s in demand and could even help you spot a gap in the market. Just make sure you speak to more than one to get a rounded view of the local market.

You’ll need to charge a rent that at least covers your costs. Consider how much you’ll spend on buy-to-let mortgage payments and other costs, like insurance, repairs and agent’s fees. It’s really important to work out what you’ll need to spend each year – and estimate the effect of any periods when the property is vacant. Seeing what other landlords and agents are charging for various property types could be helpful, too. 

You’ll also need to provide a higher deposit on a buy-to-let property – typically at least 25% – and you’ll find that the interest rates on buy-to-let mortgages are higher than they are for residential mortgages. Many lenders will also charge a product fee, and don’t forget to factor in the usual property purchase costs, such as surveys and legal fees. 

You’ll need to pay a higher rate of Stamp Duty Land Tax on properties you intend to rent out in England and Northern Ireland – the percentage increases depending on the property value. You can work out how much you’ll need to pay using the government’s Stamp Duty Land Tax calculator.

A fixed-rate mortgage guarantees that your payments remain the same during the fixed term, even if interest rates rise. However, the initial rates tend to be higher than those of variable mortgages.

With a variable-rate mortgage, you may have a lower initial interest rate, but it can move up or down, depending on your lender and changes to the Bank of England base rate. So you could see your mortgage payments go up or down over time.

With an interest-only mortgage, you only pay the mortgage interest each month. This means at the end of the mortgage term, you’ll still owe the amount you initially borrowed – and you’ll still be charged interest on the full balance of the mortgage each month until it’s repaid.

Some buy-to-let investors choose this option because the lower monthly payments make it easier to meet the rental income criteria for buy-to-let mortgages, although there are extra conditions for an interest-only deal. Many plan to sell the property at the end of the mortgage term to cover the mortgage balance.

The risk here is that if the housing market changes and your property decreases in value, you’ll face a serious loss as you’ll still need to pay back the original amount you borrowed. For that reason, most lenders will ask you to explain how you intend to pay back the amount you borrowed when the mortgage ends.

With a repayment mortgage, your monthly payments will be higher because you’ll be paying both the interest and part of the amount you borrowed. But at the end of the mortgage term, your debt will be fully repaid.

If you’re uncertain about any aspect of choosing a buy-to-let mortgage, you can get help from one of our mortgage advisers – see below for details of how to book an appointment. You can also talk to an independent mortgage broker – the Financial Conduct Authority has a register of regulated brokers that you can search.

As soon as you start renting out property, you need to let HM Revenue and Customs (HMRC) know and report your rental income to them each year. You may have to pay tax on the profit you make from renting property after deducting any allowable expenses

There are now restrictions on the amount of tax relief that landlords get. This means you won’t be able to deduct certain costs – such as mortgage interest and fees, or the interest on loans to pay for furnishings – from your income when working out your taxable profit.

We strongly recommend you read HMRC’s guide to Income Tax on rental income. And as tax laws can change, you should take advice from a qualified tax adviser before making any decisions.

Working out rental yield can help you compare the potential profitability of a number of properties. One way to do this is to use a property website like Zoopla or Rightmove to check rents for properties similar to those you’re considering.

1. Calculate the potential annual rent and subtract your costs
2. Divide the result by the property value
3. Multiply by 100 to give you the rental yield as a percentage

If you’re planning to profit by the property price increasing (often called ‘capital growth’), then you’ll need to factor in the effect of Capital Gains Tax when you sell it.

Using an agent to manage a property can be useful, especially if you don’t live near it. Fees typically range from 5% to 15%, depending on whether you want a fully managed service. You can also pay an agent to find and vet prospective clients – this can be a time-consuming process, and vetting could save you from renting to tenants who can’t afford the rent or who have committed fraud.

You have a legal responsibility to check that tenants have a legal right to rent in England. Make sure this is included in your vetting, whether you use an agent or not, as significant fines and prison sentences await those who don’t comply. The government provides a guide to checking a tenant’s right to rent.

You also have to make sure the property is safe. This means

• Arranging annual safety checks on all gas appliances, including the boiler, by a Gas Safe-registered engineer
• Hiring a Part P-qualified electrician to check that all fitted electrical appliances are safe prior to the beginning of each tenancy
• Providing a copy of the gas and electrical safety certificates to tenants
• Installing smoke alarms on all floors of the property, with carbon monoxide detectors in rooms that have fuel-burning devices (such as gas boilers and heaters)
• Getting an Energy Performance Certificate for the property within seven days of putting it on the market to tenants
• Making sure all tenants have a clear escape route in case there’s a fire and that all furniture meets safety standards
• Repairing any structural faults or broken appliances

A tenancy contract sets out the rights and responsibilities for landlord and tenant, the most common type today in England is an assured shorthold tenancy. In Wales, it’s an occupation contract. In Scotland, it’s a private residential tenancy.

It also states how the tenant’s deposit is protected. The law says you need to pay this money into a scheme that ensures the money is available at the end of the tenancy and that provides a dispute resolution service. Not using a deposit protection scheme leaves you open to legal action from tenants – courts can order landlords to pay up to three times the original deposit to tenants. See the following websites for more details.

Tenancy Deposit Scheme

My Deposits

Deposit Protection Service

Buildings insurance is a condition of most mortgages and contents cover is worth considering if you intend to rent out your property with furnishings.

You can also get specialist landlord insurance that covers your liability for loss of rent, replacement locks and keys, damage inflicted by tenants and injury or damage to possessions that happens in the property.

If you’re buying a leasehold property, you’ll need the freeholder’s permission to rent it out. And if you’re planning to rent out rooms in England or Wales to three or more individuals who aren’t a single household (like a family), you’ll need a house in multiple occupation licence.

If you inherit a property and are thinking about renting it out, don’t forget that the deceased person’s estate might be charged Inheritance Tax, which could be as much as 40%. That could mean you’d have to sell it. We recommend that you speak to a tax expert if you have inherited, or expect to inherit, a property.