RP Property & Lettings

At the time of writing this article, the property market has become very volatile; the Bank of England (BoE) base rate has risen to 4.5%, which is the highest level since 2008, property prices are on the decline and the cost of renting a property is increasing. One way or another, this is making things very difficult for people either entering or exiting the property market.

However, the rental market is at a high; the demand for rental properties has risen but the supply has reduced, which means there are more people who want to rent than properties available so even with the volatile property market, it is still worth investing in BTLs.

Please note: If the increase in interest rates is impacting your ability to pay your mortgage and you are experiencing problems keeping up with your mortgage payments, click here for some tips that you might find useful.

What is BTL?

A BTL is a property that is purchased for the sole purpose of renting it out. The property would normally be in addition to a residential property and although, theoretically, there is no limit to the number of BTL properties a person can have, lenders may take a cautionary view when considering lending to an individual who has more than 5 BTL properties so as to mitigate their risk; the greater the debt the increased chance of defaulting on the debt.

What type of Mortgage is required for a BTL property?

The type of mortgage that you need for a BTL property is different from the type of mortgage you get for a residential property. Therefore, it is better to speak with a mortgage broker who can source products that you will not get from high street banks and that can offer you competitive interest rates.

When applying for a BTL mortgage, the key points to note are:

• the value of the property; a valuation will be required
• a deposit of at least 25% of the property value
• the expected rental, which can be compared to similar rental properties in the area
• proof of your annual income, which must be over £25,000

Note: it is normal practice to get an interest only mortgage, which reduces the mortgage payments considerably.

What are the advantages of investing in BTLs?

Below are four common reasons why people invest in BTLs:

• Monthly rental; this provides a passive income whilst also covering the monthly mortgage payments. You should be aiming for a rental yield of no less than 6%.
• Annual rental increases; it is the norm to increase the monthly rental each year between 3%-5% per annum.
• Annual property price increases; property prices generally increase more than 4% per annum and historically, property prices have been known to double over 8 – 10 years.
• Equity release; when the property price increases, there is more equity in the property that can be released tax free.

What are the disadvantages of investing in BTLs?

• It is not a get rich quick scheme.
• There are new legislations coming in that landlords have to familiarise themselves with to ensure that they do not break the law.
• It is a business and although it is possible to do the work yourself, many landlords use the services of letting agencies.

How does the increase in interest rates affect the Buy-to-Let market?

Firstly, there may be opportunities to buy properties at a lower rate due to the fall in property prices but in some areas properties are still very expensive so you will have to shop around for a good deal.

However, on the down side of purchasing a property at a lower rate, mortgage payments will be higher due to the increase in interest rates. If you do decide to purchase a property, a good Mortgage Broker will be able to source the best rates for you, which could reduce your mortgage payments drastically.

If you’d like access to our list of mortgage brokers, use the contact form below to get in touch.