This guest post is brought to you by the UK's largest fee free mortgage adviser, London & Country.
With savings rates on their knees it's no wonder that investing in property has been of increasing interest to those seeking an alternative way to generate a return on their cash. Tenant demand has remained solid and as a result rental income has generally been on the rise too, especially given the ongoing challenges for first time buyers. Before taking the plunge and purchasing a buy-to-let it's crucial to run the rule over the numbers and make sure that you've budgeted appropriately.
What Deposit Will I Need?
The big commitment in terms of your capital outlay is the deposit. Buy-to-let mortgage lenders will generally require a deposit of 25% of the purchase price or more. Some lenders do offer mortgage deals to those with smaller deposits of perhaps 15% or 20%. The options are much more limited however, and the interest rates will be higher, the greater the proportion of the purchase price you are borrowing. The very lowest rates are usually on offer to those that can put down 40% or more.
What Other Costs Will I Need to Cover?
The deposit is only part of the equation and there's plenty more that you will need to budget for when purchasing a property. Just as with any other property purchase you will need to be sure that you get a survey of the property to make sure that you won't get any nasty surprises once you've bought. The mortgage lender will require a basic valuation for their purposes but it will often make sense to undertake a more detailed survey so you get the full picture.
You will also need a solicitor or conveyancer to carry out all the legal work and ensure that there is nothing adverse that could affect the title to the property. The cost will vary depending on the property value so make sure that you get a quote and factor it into the budget.
What's the Impact of the Stamp Duty Changes?
One of the recent changes for anyone buying another property, whether it's a second home or a buy-to-let investment, is the Stamp Duty Land Tax surcharge. Effective from the beginning of April anyone buying an additional property will have to pay 3% more on top of any applicable stamp duty charge. That will increase the stamp duty for a homeowner buying a £250,000 buy-to-let property by £7,500 to £10,000.
Is There Anything Else I Need to Budget For?
Buying property carries plenty of costs but you should make sure that you will have some additional contingency as well. Having a rainy day fund could be crucial for any sprucing up of the property to get it ready for letting as well as for any necessary maintenance. Don't pour all your savings into the purchase and leave yourself short of funds to deal with any unexpected cost you have to deal with.
What Ongoing Costs Do I Need to Factor into My Calculations?
Once the property is let there will be a rental income generated that will hopefully cover all the costs of running the property and enough to give a good return. In estimating what kind of profit you can expect you should bear in mind some of the costs of running the property. For example in addition to the usual ongoing maintenance you may want to employ the services of a good letting agent to manage the property on your behalf.
Another key element will be the taxation of rental income and specifically the relief on mortgage interest. That will be limited to basic rate relief eventually but the changes will be phased in gradually from next April. Make sure you get advice from your accountant on how that may affect you and help you work out realistic expectations, as your new investment begins to generate a return.
We've teamed up with L & C Mortgages to offer you fee free mortgage advice, click here or telephone (0800 923 2045) one of their expert mortgage advisers to discuss your options.
NB: YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE