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Want a buy-to-let mortgage? Three things to consider

Buy-to-let properties might sound like a good way to earn money, but extra demands on your time and pocket can make it a difficult and risky investment.

There's been a growth in popularity for buy-to-let mortgages. Latest figures from the Council of Mortgage Lenders (CML) show that there were 11% more mortgages given to landlords than 12 months ago (lending to first-time buyers has fallen by 16% in the same period).  With the reform of the pension rules, there’s also an expectation that we’ll see an increase in “silver landlords” – retirees who buy a second property in order to it rent it out.

However, returns on buy-to-let aren’t guaranteed. Property prices can fall as well as rise, and your money will be tied up for long periods. Anyone considering releasing pension funds also needs to consider whether it’s the best option for their retirement money

If you’re trying to decide if a buy-to-let property is right for you, these are the three things you should first consider.

It can be difficult to get one

You’ll struggle to get a buy-to-let mortgage if you don’t already own your own home, whether outright or with an outstanding mortgage. And you are likely to find it hard to get a buy-to-let mortgage unless you earn at least £25,000 a year.

You’ll also need good credit and be able to finish the mortgage by the time you are 70.

 

They're not subject to affordability rules

Unlike buying a home to live in, the mortgage will be treated as a commercial loan, and as such it's unregulated. That means you won't necessarily go through the same affordability tests. Instead it will be based around your rental income - although some lenders will look at what you can afford based on income to check you can still make the payments when the property is empty.

The rental income will need to be verified by a surveyor and it will typically need to be 25% higher than the mortgage payment. So if your monthly payment is £1000, the rent you charge needs to be at least £1,250.

There are plenty of ongoing extra costs

It’s not just stamp duty, solicitor and completion fees when you buy the property you need to account for.

You may have to pay for letting agents and finding tenants, any emergency repairs and general maintenance costs, and buy special landlord and rent insurances. Plus the property could be empty between tenants, with no money coming in. There’s also the potential for fines if rules and regulations aren’t met.

There could be capital gains taxes when you sell, while the additional income from tenants will also be subject to income tax. Landlords would also be subject to inheritance tax when they passed away if they still held the assets.

You’ll also have more demands on your time as the properties don’t look after themselves.

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