Buying a property and renting it out might seem like an easy way to make money. But changes to the private rented sector mean it’s no longer that straightforward. Many current and potential landlords will be questioning: is buy to let worth it?
The sector has changed a lot in the past few years. Landlords have seen both changes to the tax regime and rising interest rates impact the profit they make from property.
Meanwhile resentment is growing from tenants who are campaigning for rent freezes, longer tenancies, and the scrapping section 21 evictions.
What are the pros and cons of buy to let?
If you buy the right property in the right location and are lucky to find good tenants who pay the rent on time, than buy to let can be worth it and even a solid investment.
Landlords make money in two ways: from the rent each month and from rising house prices.
How much money you make from rent will depend on how much rent you can charge compared to the monthly mortgage on your property. You’ll also need to factor in maintenance and repair costs.
Since 2020 landlords have only been able to claim tax relief of 20% on mortgage payments. It’s no longer possible to claim 40% even if you are a higher rate taxpayer. This change has seen many landlords’ profits plummet.
Buying a buy to let property
It’s important for potential property investors to understand that buy to let could be worth it but it is not a hands-off investment. In fact, it takes a lot of work.
Even if you hire a letting agent to manage your rental property, you might still need to arrange repairs and maintenance. You can also run into problems if tenants stop paying the rent or decide to move out at short notice.
Who needs a buy-to-let mortgage?
If you buy a property intending to rent it out, unless you’re a cash buyer, you’ll need a buy-to-let mortgage. You can’t normally let out a property if you have a standard residential mortgage.
The only exception to this is if the mortgage lender grants you ‘consent to let’ for an agreed period of time. But this consent would only normally be given for existing mortgages.
If you let your property without the right type of mortgage or consent from your lender, this could potentially be viewed as fraud and could have serious consequences.
It’s always worth to speak to a mortgage adviser to discuss your mortgage options.
Your property may be repossessed if you do not keep up repayments on your mortgage.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Do you need a deposit for a buy-to-let mortgage?
Buy-to-let mortgages normally require a bigger deposit than residential mortgages. Most lenders will require a 25% deposit although some will require just 15% or 20%.
Deposits are higher for buy-to-let mortgages because lenders consider this type of mortgage to be riskier than an owner-occupier mortgage. This is because there may be periods of time when the property is empty. Or the tenants don’t pay the rent.
How much can I borrow as a buy-to-let mortgage?
When you take out a residential mortgage how much you can borrow is determined by your income.
But buy-to-let mortgages work in a different way. How much you can borrow depends on how much you can rent the property out for.
Mortgage lenders usually require the rental income to be 125 to 140% higher than your mortgage payment. This is known as the ‘rental cover’.
At rental cover of 125%, you’d need to be able to achieve £1,250 in rent each month to service a mortgage of £1,000 a month.
Our advised mortgage advisers Rated Excellent on Trustpilot and are winner of the 2021 Best Mortgage Broker award.
Your property may be repossessed if you do not keep up repayments on your mortgage.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.
Where are buy-to-let landlords buying now?
So, is buy to let worth it? How good an investment a buy-to-let property is can be measured by its rental yield.
Rental yield is the return a property investor is likely to achieve on a property. It is a percentage figure, calculated by taking the yearly rental income of a property and dividing it by the total amount that has been invested in that property.
According to research by a UK online property portal, the best areas for rental yield in the UK are East Ayrshire, West Dunbartonshire, North Lanarkshire, Renfrewshire, and North Ayrshire, which are all in Scotland.
In England the best areas for buy-to-let are Burnley, Hartlepool, Middlesborough and Sunderland. London tends not to achieve high rental yields because, even though high rents can be achieved, property prices are very high.
Last Updated: December 19th, 2022
