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Are you looking for a new BTL Mortgage, Re-Mortgage or to raise some more capital ?

For those wanting to understand more about the BTL business and the implications of financing your property, please find our overview and guidelines on the market below.

Background

Buying property to let has become big business in Britain. Low interest rates made mortgages more affordable and rental income has seemed attractive compared with what you could earn on other investments.  But with interest rates rising, the cost of property high and rents failing to keep pace, buy-to-let is a tougher prospect than it once was.

The Basics
 
The Association of Residential Letting Agents, (Arla), operates a buy-to-let scheme supported by a panel of lenders.  But other mortgage providers operate outside the scheme leaving you free to make your own arrangements for renting out the property without going through an Arla agent.
The main difference with a buy-to-let mortgage is that the lender can take account of the rent you will earn, as well as your income from your job.  Some lenders allow you to add the rent to your salary while others base the loan entirely on rent.

Borrowing Rules

How much you can borrow depends on the lender, but the maximum ranges from £150,000 to £1m per property, and the most lenders will lend has traditionally been 85% of the property price.  This means you need a deposit of at least 15% and deals become more competitive if you can put down 20% or 25%.  As the market has got tougher, increasingly lenders are offering buy-to-let loans at higher loan-to-value rates.
A lender will also take into account how much money you earn on the property.  The formula varies but as a rule the rental income should be 125% of the mortgage payment.  So if your monthly repayments are £500, the rental income you need should be £625.  Some lenders may prefer to lend a multiple of your salary, say three times, plus half the rental income.

Mortgage Costs

Buy-to-let mortgages are generally slightly more expensive than ordinary home loans, but rates have come down in recent years as more providers have entered the market.  Before ARLA launched its scheme in 1996, lenders charged commercial rates on loans taken out to buy property to let.  This is no longer the case.  All the usual deals apply, such as fixed and discounted rates..
Some lenders will also set rules on multiple properties, only accepting people with, say, three or five BTL mortgages.  Some may also set an an upper limit on the overall amount you can borrow.
Fees are broadly in line with those on conventional mortgages and for the best deals normally a higher arrangement fee is charged.

Tax Breaks
 
There is no direct tax relief on buy-to-let mortgages, but you can offset interest payments on your mortgage against tax on rental income, along with other expenses such as agents' fees and maintenance costs.
You should also remember that buy-to-let mortgages are not regulated by the Financial Service Authority in the same way traditional home loans are now controlled.  This means buy-to-let lenders do not have follow such strict rules on how they sell, promote and advertise their deals.

Income Tax
 
Rent will be treated as income and taxed in line with your basic or higher-rate tax bands.  You will, however, be able to offset mortgage interest payments, letting agency costs and maintenance expenses against the taxable rental income. This makes it more tax-efficient to have a mortgage on your investment property rather than your main home where you can no longer get tax relief on your mortgage.

Tax on the price rise

Capital gains tax kicks in when you sell your second home.  But you will receive taper relief, which gradually cuts your tax liability depending on how long you have owned the property.  After three years you would be taxed on 95% of the gain.  This falls each year, and after ten years you would be taxed on only 60% of the gain.   When you sell the home, you will be taxed at between 20% and 40% on all relevant capital gains above a basic limit.

Changes to CGT in April 2008
 
Capital gains tax and the taper relief system will change in April 2008, after new rules were announced in the Pre-Budget Report in November 2007. From the new tax year, capital gains tax will be levied at a flat rate of 18% with taper relief abolished. This will benefit the vast majority of buy-to-let investors and simplify the current complicated system. This is a complicated area and you should always seek advice from a fully qualified accountant.

TENANT's RIGHTS

Types of tenancy

The vast majority of people who rent their home are on Assured Shorthold Tenancies (AST), but other agreements do exist which afford different levels of rights.
For tenants who are not on an AST, if they are a council or housing association tenant then they may be on a secured or assured tenancy which holds increased rights against eviction and for passing on tenancies.  In contrast, if a tenant lives in accommodation that is occupied by their landlord, rented from the Crown, a student residence, or a hostel or bed and breakfast then they may have only basic rights. People whose accommodation is provided by their job or is part of agricultural premises are covered by different rules.
 
Assured shorthold tenants
 
Private rented tenants will automatically be assured shorthold tenants if they moved in after 28 February 1997, pay rent to a private landlord who does not live in the same building, and can prevent others' access to their home.  This will also be the case if they moved in after 15 January 1989 and were given a notice informing them they were assured shorthold tenants.
An assured shorthold tenancy gives people a legal right to live in their home, either for a fixed-duration or on a rolling contract known as a periodic tenancy.  The law provides basic rights and other conditions may be added into the tenancy agreement to be signed by the tenant and landlord.  Tenants have the right to live there until the agreement ends or a court order is sought, to get information about their tenancy provided within 28 days, stop others entering their home and get repairs done.  A tenant has the right to live in their home without being disturbed.  The landlord and other people cannot enter freely when they wish and must seek permission to visit – typically at least 24 hours at a mutually convenient time.

Rent and repairs

An agreed rent must be paid on time and if this is not done landlords may take court action to have tenants evicted.  If a person pays weekly rent, a rent book must be provided.  It may be possible for tenants to seek housemates to move in as subtenants or lodgers.  It is vital to ask a landlord's permission for this otherwise a tenant may be in breach of their agreement.
Landlords must by law do repairs to keep the building in good condition, keep gas, electricity, heating and water equipment up to scratch and do other agreed work.  Landlords must have a valid gas safety certificate for every gas appliance and furniture should be fire resistant.
Tenants are responsible for looking after their home, which includes keeping it clean, and simple tasks such as changing bulbs and fuses.  If repairs need to be done, tenants should inform the landlord. If the landlord refuses to do them it may be possible to force them to.

Notice and eviction

A tenancy runs until it is ended by a tenant or landlord through agreed surrender of the property, a notice being served, or eviction.
Tenants on fixed-terms can only end the tenancy during that time if their agreement says so, dependent upon the agreed notice period.  From the date the fixed-term ends a tenant can leave, but should still give a month's notice to the landlord.  If the tenant opts not to leave, the tenancy becomes a rolling agreement.  Tenants on periodic tenancies or rolling agreements should give one month's notice in writing, ending on the day rent is due.  A landlord must give notice if they want a tenant to leave.  Unless this is for eviction then this should be either be the agreed term in the tenancy agreement, or two months, or how long rent has been paid for, whichever is longer.
Under an assured shorthold tenancy a tenant can be evicted reasonably easily.  This is common for problems such as rent arrears, or consistent late payment, but may also occur under a periodic rolling contract, or fixed tenancy that has run out, or if a tenant challenges a rent rise or demands repairs.
Under a rolling agreement or once a fixed term has ended a tenant can be removed with a court order with the correct notice given, without any burden of proving wrongdoing.  During a fixed term tenancy a court will require the landlord to give good reason for eviction and then consider whether that is a reasonable course of action.

RESPONSIBILITIES

With rights come responsibilities and tenants must keep within the terms of their rental agreement, which may have specific clauses inserted.  General conditions mean rent should be paid, in full and on-time, bills sorted, good care taken of the property, tenants and visitors must behave responsibly, permission be granted for access when needed and requests be made for any repairs or extraordinary occurrences.  Tenants should also not leave their home empty beyond a certain period of time, typically a week or fortnight, without warning the landlord.

Here are five tips for a tough buy-to-let market.

1. Do the figures stack up ?
The traditional criteria with buy-to-let was to save a deposit of at least 15% and ensure that rental income would cover monthly mortgage repayments by 125%.  As it got harder to meet these restrictions, many lenders eased them.  This has shifted buy-to-let from a business based on steady rental income, to one where potential landlords gambling on house prices rising to deliver capital growth.   
But the restrictions existed for a reason – to make sure landlords could cover gaps between tenancies, income exceeded bills and give room for rate rises.  
With analysts predicting a house price slowdown and higher interest rates, sensible landlords will still protect themselves by sticking by the 125% rule.  This is especially important as the current backlash against buy-to-let may lead to the abolishment of mortgage interest tax relief on buy-to-let.

2. Follow your head, not your heart
It is easy to get carried away by a property that is your ideal home rather than matching your target rental audience.
Don't pay over the odds for a luxury designed property, you are unlikely to get the money back in rent.  If you can get a bargain property that needs sprucing up, remember if it needs major renovation you will have to pay the mortgage while you do the work before you can rent it out.

3. What is the market like ?
What is the demand for rental properties and who is driving it? Researching an area, its rental values, property price growth and who wants to live there is vital.  
A university, big business park or airport could make one town a better rental bet, even though it may seem less attractive than a more expensive neighbour.  Don't be blinkered.  If you are serious about buy-to-let as a long-term investment, then be prepared to work hard and explore different areas.

4. Does the property fit ?
Who is your potential tenant ?  If there are a wealth of properties around, tenants may turn yours down for minor reasons.  What is the local area like ?  Students or young professionals will want pubs, bars and good but cheap restaurants.  Families want open space, schools, nice restaurants and good transport links.

5. Weigh up extra costs
Flats need maintaining, tenants need washing machines, fridges and possibly furniture.  Tenants will not put up with discomfort while you save up for repairs.  Make sure you factor these costs into your budget.

Decide whether you will need a letting agent or not.  If you live nearby it is possible to manage your rental yourself, otherwise it can be very difficult.  Letting agents may charge a 10% of rent fee, but it is often worthwhile.

The Financial Services Authority does not regulate some forms of buy to lets, unsecured loans, secured loans, commercial loans, overseas mortgages and conveyancing.