buy to let

Buy-to-Let is a joint initiative by the Association of Residential Letting Agents (ARLA), and the mortgage lenders. The scheme is designed to help private individuals to invest in property to let without being penalised by mortgage surcharges or paying commercial rates of interest. Mortgage lenders in the Buy-to Let scheme will take account of rental income likely to be achieved from a property.

What's so different?

Historically, borrowing on income-producing property has been viewed by lenders as a commercial proposition. So, mortgages on property to let, even for private individuals, have attracted higher rates of interest than the standard mortgages offered to owner-occupiers.

In addition, until now, rental income has usually been disallowed when assessing a borrowers ability to meet mortgage payments.

Now, the view of many lenders and all other housing professionals is that growth in the private rented sector must be encouraged. Not only does it lag well behind the private rental sectors of all the other advanced economies, the lack of choice between renting and buying is, in fact, bad for the economy and a contributory factor to the booms and busts of the housing market over the last decades.

But, the change in lending criteria and the lowering of interest rates for private investors has only been made possible by the strong presence of professional, bonded letting agents in the lettings market.

What are the returns from letting property?

Gross returns - the rent received before taking account of the cost of letting such - as management fees, maintenance, service charges ground rents and insurance can be as high as 8% to 10% This may reduce by up to half for very expensive properties.

The average rental return in Britain today hovers around the 6% mark, and capital appreciation is likely to match, if not exceed, inflation for the foreseeable future.

Clearly, depending on personal circumstances, it is recommended that the monthly rental covers or exceeds the monthly mortgage repayments and running costs related to the property.

What difference does a Letting Agent make?

Buying a property to let is not the same as buying your own home. Mortgage lenders will want to know that an ARLA member agent, such as Ashton Burkinshaw has been advising on the selection of properties suitable for letting.

Ashton Burkinshaw will know the local market, whether there is a demand for say, two-bedroom flats, or four bedroom houses, or for properties close to schools or transport links or secluded properties with gardens. Also we will know the standard of decoration, furnishing, fixtures and fittings required.

Then there is the selection of well vetted tenants who will pay their rent on time and leave the property on time and in a proper state; and there is the management of the tenancy.

Knowing that the management of any inherent risk is in the hands of a professional agent enhances the creditworthiness of Buy-Let propositions put to mortgage lenders.

How to Buy-to-Let

Armed with suitable advice from Ashton Burkinshaw, Buy-to-Let investors can start on a property search; or a letting agent may do this for them, instruct their own sales department or work with the best estate agents in their area.

Once a property has been found, Ashton Burkinshaw will confirm whether or not it has letting potential, the range of the likely rent that can be achieved in current local market conditions and advise on the need - or otherwise -for re-decoration and new fixtures and fittings to attract good tenants and to reduce the risk of lengthy void periods.

How are mortgages arranged through the Buy-to-Let initiative?

Broadly, there is little difference between arranging a Buy-to-Let mortgage for investment landlord's and a standard mortgage for owner-occupation. Buy-to-Let mortgages are subject to the usual status checks. Loans can be arranged for terms of between five and 45 years and for up to 80% of the value of the property. Through the Buy-to-Let initiative, rents achievable from an investment property can be taken into account, provided an ARLA member agent is to be responsible for letting and managing the property.

The Do's and Don'ts of Buying to Let

DO Think of buying to let as a medium to long term investment.

DO Seek advice from an ARLA letting agent on local market demands.

DO Get your sums right. Will the rent cover borrowings and costs, after allowing for void periods?

DO Decorate, fit out and furnish to high quality standards, especially kitchens and bathrooms, to attract the best tenants and let quickly every time.

DO Use an ARLA member as your letting agent. They are bonded, hold Professional Indemnity Insurance to required standards and are kept up to date with the latest legal and regulatory requirements.

DON'T Let personal taste cloud your judgement. Be sure the property you choose meets market requirements.

DON'T Purchase anything with potential maintenance problems like a lot of woodwork or large gardens. It will add nothing to the rental value and cost a lot to keep up.

DON'T Think that the running of an investment property to let can be left to friends or relatives in your absence. Tenants require a full management service.

DON'T Use off-the-shelf tenancy agreements from HMSO or law stationers, or forget to issue the right notices or fail to have a proper inventory and condition report made before a tenant moves in. Leave all documentation to a professional agent.

DON'T Furnish with second hand furniture or cast-off soft furnishings. This will probably contravene the Furniture and Furnishing Regulations.

What other costs should be taken into account?

Letting agent's commission and management fees, Insurance (Building/Contents/Rental and Legal Expenses Cover), the costs of keeping the property in a marketable condition, service charges and ground rents - if a leasehold. (The tenant is responsible for such items as utility accounts, Council Tax and TV license fee etc.)

Tax and allowances

Deductions against tax on rents received may be claimed for the costs of maintenance, such as insurance, cleaning, gardening, agent's commission and other reasonable management expenses (but not improvements).

The initial cost of furniture fittings and fixtures is not allowable, but the actual cost of subsequent replacement may be claimed; or, alternatively, a wear and tear allowance of 10% of the rents received may be deductible.

Improvements may be set off against any further Capital Gains Tax.

Note: This page is for guidance only. The responsibility or the financial decision to Buy-to-Let can only rest with the investor. Most letting agents will not accept responsibility for the validity of investments, costs incurred or for mortgage arrangements made, although those who are also registered as financial advisers may do otherwise. It should be noted that as with any investment, returns and capital values can go down as well as up; and the investor should be fully aware of the terms and conditions applied by the chosen mortgage lender. Letting agents must present their own written terms of business for letting and managing properties.