Becoming a private landlord should not be seen as an easy way of making money. It can be riskier and more complicated. It can also be very time consuming, more than most forms of investment, and there is no guarantee that house prices will rise. That said, having a second property to let to tenants could reap considerable financial rewards over time.
There are 3 main differences in buy to let mortgages:
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Rent Potential - the decision as to whether or not a mortgage will be offered is usually based on the rent you will earn as well as your income. In some cases your income is not ever considered.
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Interest Rate - buy to let mortgages have slightly higher interest rates.
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Larger Deposit - typically a minimum of 20% or 25% of the property's value is required as a deposit.
When buying a second property to let, you will need to decide whether your primary objective is income or capital growth. In other words, are you looking to make a profit month on month or are you looking to make a profit through increased equity from the second property if it increases in value over time? The decision may affect the type of property you purchase, and the location.
Limited Company Buy to lets
We offer specialist finance for property professionals operating under a limited company or special purpose vehicle (SPV). These mortgages allow investors to either purchase or refinance an existing property, to be let on a residential basis, which is a hot topic at the moment due to recent changes to tax in the recent budget.
Finding finance to invest in a property as a limited company is a specialist requirement. At Michael Graham Private Finance we have a number of lenders who provide mortgages for this specific purpose.
We can usually provide finance for all types of residential buy-to-lets. As an SPV, your company’s sole activity should be property investment and borrowers should be able to demonstrate a track record in property management.
When you manage a property there are many costs involved in addition to the monthly mortgage repayments. As a guide, you should be aiming to achieve a gross rent of about 145% of the rental property's interest only mortgage repayments in order to cover your costs should anything go wrong.
These additional costs include:
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Property upkeep - maintenance costs for the property.
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Letting agent's fees - letting agents charge around 10% of the monthly rent for finding and vetting tenants with an additional cost of around 5% if you require a full management service.
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Ground rent / service charges - applicable to leasehold properties.
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Legal insurance - to cover costs from evicting tenants in the event of non-payment, very important, as this can be very expensive.
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Insurance - building insurance and contents insurance for the items provided as part of the rental agreement.
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Furnishings - the purchase of any furniture. If the property is to be let furnished, make sure you are covered for this by your home insurance.
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Gas / electrical appliances - cost of maintaining appliances and ensuring they comply with any regulations such as safety tests.
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Decorating costs - the property may require work ranging from painting, to a new bathroom suite before it is suitable for letting to tenants.
When choosing a property to let, it is wise to take advice from local letting agents to determine; what types of properties are in need and which parts of the town are best or most wanted. They can tell you if there is a University in the town, and if students are looking for somewhere to live.
BUY TO LET TAXATION CHANGES
Are you aware of the taxation changes?. These changes started being phased in from 2017 and fully implemented by 2020 and will have a significant impact on most landlords.
Historically the tax relief available on buy to lets has made them an attractive investment for any investor, however the new rules may make both new and existing investors think carefully when purchasing an investment property, in particular their tax position.
What is changing?
From 2020 Tax relief will be restricted to 20% for everyone - the reduction will be phased in over the four years.
The wear & tear allowance of 10% generally calculated as 10% of the gross rents was abolished in April 2016 - Investors will only be able to deduct the actual cost of replacing furnishings in the tax year of the replacement.
This (especially as interest rates rise) for investors with significant levels of debt will see an overall significant increase in costs.
An example of this:
A top rate tax-payer owns an investment property worth £2m financed by a loan of £1.2m with interest charged at 3%. This generates a gross income annually of £80,000.
| OLD | NEW |
TAX INCREASE |
|
|---|---|---|---|
| Income | £80,000 | £80,000 | |
| Wear & Tear | (£8,000) | ||
| Less loan interest | (£36,000) | ||
| Taxable profits | £36,000 | £80,000 | |
| Tax at 45% | £16,200 | £36,000 | |
| Less interest at 20% | (£7,200) | ||
| TOTAL TAX | £16,200 | £28'800 | £12,600 |
Other changes that may have an effect on the market are:
- Corporation tax reduced to 19% in 2017 and 18% by 2020.
- An additional tax charges recently came into force on dividends, every individual will have a tax free dividend allowance of £5,000. After that dividends will be taxed at 7.5%, 32.5% or 38.1% depending on whether the individual’s income falls into the tax bands.
STAMP DUTY:
Anyone buying a second home or buy-to-let property now has to pay a 3 per cent surcharge on their stamp duty.
Stamp Duty Changes
| property value | standard rate | buy-to-let/second home rate |
|---|---|---|
| Up to £125,000 | 0% | 3% |
| £125,000 - £250,000 | 2% | 5% |
| £250,000 - £925,000 | 5% | 8% |
| £925,000 - £1.5m | 10% | 13% |
| Over £1.5m | 12% | 15% |
Rate applies to that portion of the purchase price (2) Properties up to £40,000 are exempt from stamp duty. Properties between £40,000.01 & £125,000 will be charged stamp duty on the full purchase price.
*Please Note: This document does not constitute tax advice, investors should not rely on the information given and should investors have any concerns/queries then they should contact their tax advisor.