Interested in buying a property to rent out?
Owning a buy to let property carries risk – and as a landlord, you have responsibilities and obligations.
We subscribe to the UK Finance Mortgage Lenders’ Buy to Let Statement of Practice and this page will help you understand the risks associated with becoming a landlord and taking out a buy to let mortgage.
It will always be your responsibility to meet the costs of the mortgage. Your rental property may be repossessed if you don’t keep up repayments on your buy to let mortgage, and we may appoint a receiver of rent. Any shortfall after the property is sold would remain your responsibility.
Can you afford the mortgage?
Lenders assess whether you can afford a buy to let mortgage based on your expected monthly rent. But the actual income you make could be different due to a number of factors.
All these situations could potentially affect your income and ability to make your payments.
- Increased costs – for example, an increase in letting agent fees could affect your rental income.
- Interest rate rises – a rate change could increase your monthly mortgage payment. When you take out a mortgage with us, we’ll give you a detailed mortgage illustration and this will show you what effect a rate change could have on your monthly payments.
- Market changes – there could be times when you need to reduce the rent, perhaps to attract tenants.
- Property vacant between tenants – if the property can’t be let or you can’t find a tenant for a while, you won’t receive any rent.
- Maintenance work or unexpected repair costs – your ongoing maintenance charges could increase or you could have a one-off emergency repair to pay for.
- Tenants falling into arrears – rent dispute can take months to resolve and have a serious impact on your finances. You might also have to evict your tenant. Look at www.gov.uk/private-renting-evictions for more information.
In line with the terms and conditions of your mortgage, you’ll still have to cover your monthly mortgage payments – so you may want to think about putting a savings plan or other contingency in place in case there’s a shortfall.
Your regular monthly mortgage payments only cover the interest charged on the money you’ve borrowed. The original funds borrowed (the ‘capital’) remains outstanding and will need to be repaid (in full) at the end of the mortgage term assuming all interest payments are made in full and on time).
Do you need a licence to rent out the property?
Some properties – in areas where there is low housing demand or high levels of anti-social behaviour – are subject to selective licensing by the Local Authority. It’s a scheme designed to improve conditions and tenancy practices in the private rented sector to make sure they have a positive impact in those areas.
If this is the case, you’ll need a licence to privately rent out your property. It could cost around £500 a year. Go to www.rla.org.uk to find out if your area is affected.
Buy to let tax changes
Previously, landlords could deduct mortgage interest and other finance costs from their rental income to arrive at the amount that the tax is calculated on - their 'rental profit'.
However, from 2017/2018, the tax is calculated based on turnover rather than profit. The deduction of mortgage interest (and finance costs) from your taxable profit will be gradually replaced with a tax relief allowance.
This will be at the basic rate of tax and will partly offset the tax due on your rental profit.
The changes will mostly affect higher and additional rate tax payers with the amount of tax relief that applies being phased in over four years from April 2017.
Overall, the amount of tax you'll pay will depend on all your sources of income - rental profits, employment, pensions etc. But these tax changes could move you into a higher tax band so you should be aware of them before you decide to purchase a buy to let property.
This information shouldn’t be taken as tax advice
To find out how any tax changes will affect your income and circumstances, you should:
- Speak to an independent tax advisor and/or your financial advisor
- Contact your local tax office
- Visit www.gov.uk for more information.
Before your tenants move in
- Take up references from previous landlords and current employers
If you’re using a letting agent to find your tenant, they should do this for you.
- Take and hold a deposit (usually equivalent to one month’s rent)
You’re legally obliged to protect this with a Tenancy Deposit Scheme (TDP).
There are two types of deposit scheme:
- Custodial - a free scheme where the deposit is held in a bank account and returned at the end of the tenancy, such as the Deposit Protection Service: www.depositprotection.com
- Insurance - you or your letting agent holds the deposit and pays a fee to insure it.
You must return the deposit to your tenant no later than 10 days after they’ve moved out, unless you’ve got a valid reason to keep all or part of it.
For every tenancy, you’ll need a tenancy agreement. This is a legally binding contract between you and your tenant. The most common forms of tenancy agreement are Assured Shorthold Tenancies in England and Wales, Private Tenancies in Northern Ireland and Private Residential Tenancies in Scotland. Most landlords offer a minimum contract of six months.
Both you (as landlord) and your tenant must sign the agreement. The ‘private renting’ pages at www.gov.uk have more information.
- Length of tenancy and the date it started
- Details of tenants, landlord and all other parties involved
- Deposit amount and how you’ll protect it
- Monthly rental amount, when it’s due and how it must be paid
- Notice periods for both you and tenants
- Landlord’s and tenants’ obligations during the tenancy
Under the terms of the mortgage, you must have buildings insurance in place – this covers structural damage and the cost of rebuilding your property if necessary.
You can also take out insurance that covers you for tenants failing to pay their rent, as well as:
- Legal cover – for potential disputes
- Landlord liability – to protect you from compensation claims
- Landlord contents insurance – to protect fixtures, fittings and furniture if property is furnished
- Accidental damage cover – or glass and sanitary ware, ceramic hobs and underground pipes
- Glass and lock replacement
- Boiler cover
- Emergency cover – to insure you against call-outs for certain items, such as broken central heating, gas/electricity or burst pipes or drainage problems
- Public liability cover – in case a claim is made against you
After your tenants move in
You must treat your tenants fairly and equally, and maintain the property to comply with recommended safety standards.
If your property is leasehold, you’ll need make sure the ground rent is paid, and comply with reasonable requests from the freeholder or managing agent.
If your tenants fall into arrears
If the worst happens and your tenants can’t or won’t pay their rent, it could take months to resolve via your letting agent or the legal system.
Ending a tenancy agreement
When the tenancy agreement comes to an end, or if you want to take back possession of your property before it comes to an end, you can, as long as you give your tenants at least two months’ notice to leave.
If they refuse to leave, you’ll need to start a legal process of eviction through the courts. You can’t evict them yourself and you can’t legally remove a tenant from the property without an eviction order.
If you have any queries about a dispute, take legal advice as quickly as possible.
Planning to move in yourself?
If you have a Buy to Let mortgage with us on your rental property, and you want to live there when your tenants move out, we need to make sure you can afford the new repayments – so we’ll take you through a full mortgage application.
Keeping your investment into retirement
If you’re extending your Buy to Let mortgage past your retirement age, there are some additional factors you’ll need to consider:
Your income is likely to be less than when you were working, and your tax status may have changed, so:
- Will a buy to let investment still be profitable for you?
- Could there be additional outgoings that you’ll have to pay?
The value of your property could decrease over time, and this could have an impact if you’re planning to sell the property. Your rental income could also go down.
- What would this mean if you were dependent on it for your retirement income?
- Do you have other sources of income, for example, private pensions or savings that could supplement this potential shortfall?
England and Wales Government - www.gov.uk/renting-out-a-property
Scotland Government - www.mygov.scot/renting-your-property-out
National Landlords' Assoiation (NLA) - www.landlords.org.uk
Residential Landlords' Association (RLA) - www.rla.org.uk
Association of Residential Letting Agents (ARLA) - www.arla.co.uk
Resources and advice for Landlords - www.informedlandlords.com
Maintaining a property
The older we get, the more likely we are to suffer from ill-health.
- Will you be able to physically maintain a property – and manage the tenants?
- Who could manage the property for you if you weren’t able to?
A buy to let investment is an asset that should be taken into account when planning your estate. We always recommend that you talk to a legal advisor.
- There may be inheritance tax implications associated with your property
- You may need to make a will or update your existing will.