What to weigh up before you consider investing in buy-to-let property

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If you’re thinking of buying an investment property and you’ve not done this before, what should you weigh up? Here’s your checklist before investing in property

Sorting out the finance
Buy-to-let mortgages are becoming more competitive, but raising finance is still the biggest stumbling block for first time investors.

1. Maximum loan-to-value limits are 75-80%. The bigger the deposit, the better your choice of mortgage deals.

SAVVY TIP: You may be able to get a loan with a slightly higher loan to value, but you won’t get much choice of deals. You can compare buy to let mortgages at mortgage brokers John Charcol – buy-to-let best buys, SPF Private Clients investment mortgage table and at mortgage broker London & Country’s best buys.

2. Expect lower loan-to-value limits on new build property. After problems with overvaluations and mortgage fraud before the credit crunch, you will need a bigger deposit if you’re thinking of buying a new build flat.

3. Arrangement fees can be high. Most arrangement fees are a percentage of the loan (which can be up to 4%) — so on a £150,000 loan, you would have to pay an arrangement fee of £6,000.

SAVVY TIP: Unlike ordinary residential mortgages, buy-to-let mortgages aren’t regulated by the Financial Conduct Authority. That means you don’t have the same protection and you can’t complain to the Financial Ombudsman Service if there’s a problem and the mortgage lender or broker can’t sort it out.

4. Lenders will scrutinise credit score information carefully. Stephen Noakes, from Lloyds Banking Group (whose brands make up the biggest buy-to-let lender), says that the type of property you buy will have an impact on how carefully your credit history is checked. “If you want to buy a property in an area that’s likely to be down valued, lenders will look at your credit history much more carefully.”

5. Lenders will expect rents to cover mortgage payments by around 135 – 140%. This means that your rent should be significantly higher than your mortgage payments. You should also factor in a void period of one month per year and assume that rents may fall in the future, rather than rise.

SAVVY TIP: Lenders will work out affordability on the basis of a repayment mortgage at a prescribed rate. Even if you take out an interest-only mortgage to purchase a buy-to-let property, the lender will assume you’ve taken out a repayment (capital and interest) mortgage and may use a standard interest rate, even if you’ve managed to get a competitive deal. It can mean it’s harder to make the figures stack up.

Look at the figures
It’s easy to focus on property prices (not least because that’s what the media gets very excited about!). But for buy-to-let investors, it’s the rental yield that’s important. The rental yield is the rent per year expressed as a percentage of the cost of buying a particular property.

Choose your property carefully
Don’t choose a home you’d like to live in as it may not be right for the market.  Read my article on Buy to let for beginners – how to get started with buying investment property elsewhere in this section for information on researching the market.

1. Be prepared for prices to fall. Housing and investment property are often seen as a one way bet. But I’m afraid it isn’t, so make sure the maths of the deal still add up if prices fall.

2. Talk to at least two lettings agents. Even if you’re planning to rent out the property yourself (rather than using a lettings agent), a good lettings agent will be a valuable source of information about the type of properties that are renting and how much they’re renting out for.

SAVVY TIP: Currently there’s no licensing or regulation of lettings agents, but members of ARLA (the Association of Residential Lettings Agents) have to sign up to a code of conduct.

3. Understand the rules and regulations. There’s been an increase in legislation for landlords over the last few years. Energy performance certificates and the tenancy deposit protection scheme are two examples. Find out more about energy performance certificates on the Gov.uk website. I’ve written an article about Protecting your deposit if you rent a house or flat. The article is aimed at tenants but it tells you what you need to do as a landlord.

SAVVY TIP: The National Landlords’ Association is a useful organisation for landlords to join as it has an advice line, information and resources.

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