The number of buy-to-let loans being taken out is still rising each year.
According to new government figures, around £1 in every £7 lent on mortgages go to private landlords. Falling house prices in some parts of the country has led many existing landlords to snap up more properties while the prices remain low.
It is also a fact that most banks and building societies are much more inclined to lend money to established landlords because they are seen to carry less risk. Not only are landlords buying up more property, but regular homeowners who have paid off their mortgage are now looking at the buy-to-let market for the first time for a bit of extra retirement security.
Adding up the figures
While buying a rental property is not cheap, buy-to-let loans are very similar to ordinary mortgages.
You will still need a deposit of about 25 per cent. Most landlords tend to take interest-only loans, where just the mortgage interest is paid off, but none of the capital. Because an interest-only loan is cheaper, you may simply choose to rent out a house for a few years then sell it on for a profit.
The only downside to starting up a rental property business is that mortgage arrangement fees on buy-to-let loans can be pretty prices. You can expect to pay around £2,000, or 3.5 per cent of your mortgage. Your bank will also need to know how much rent you are expecting to secure from the property. You can do this by comparing rental rates online by looking at sites like Zoopla and Right Move.
Mortgage lenders will also want see that the rent you charge will be 125% of your monthly mortgage payment, so for example if your repayments are £524 a month, the lender would then want to make sure the rent equals 125 per cent of this — so £655 a month. Setting your rent in this way will help to protect you should there be a swift rise in interest rates.
You will also have to take into consideration the extra costs of stamp duty, property valuations, structural surveys and necessary legal work. You could plan to use a lettings company to sort out finding you a tenant, or you could save yourself some money by hiring theanswercentre.co.uk to handle your telephone enquiries for you. This is a great service to use while you are busy showing around potential new tenants or taking care of any refurbishments or redecoration needed at your rental property.
Back up money
Letting out your property can take time. Even one month of your property sitting empty can severely drain your finances. It is wise to have a cash-pot of reserve money that you can draw on while you are waiting for your rental money to start coming in.
Plus, should you have a high turnover of tenants, you may need to factor in redecorating costs between tenants.
You should also keep an emergency reserve of money to cover any unexpected accidents or events that may need fixing, such as broken windows, flooding from burst pipes or boiler breakdown or replacement.