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What are the “Buy to let” rules you need to understand?

Buy to let is a scheme that allows becoming a landlord, even if you are not going to live in that house. Basically, buy to let means purchase of a property with the sole intention to let it to tenants, opposite to buying for your residential purpose.

Location

As in every aspect of the housing market, location is one of the most important aspects to take into consideration. When it comes to buy-to-let, before buying a property, think about the tenants in your target. Students, young couples or family with kids? Students want cheap accommodation near the university, and they are also the ones more likely not to preserve the building in the same pristine condition. Young couples will want something in between a quiet area and vivid nightlife. When it comes to family, there's the neighbourhood, a good school and the noise nuisance to be considered.

Budget

Do you already have the money for this investment or are you planning on taking a mortgage? If you need a mortgage, the lender calculates your affordability different than for a residential mortgage. For example, your primary income source is the rental earnings in a buy to let mortgage. This rental income must reach at least 125% of the monthly payments. A 25% leeway guarantees the lender that you are still able to cover your payments, even in a first period without tenants. Even the down payment is larger when it comes to buy-to-let, from anything starting with 25% up to 40%. Even if the mortgage rates are low, the loan fees will be higher than for a residential mortgage.

Can you be a buy-to-let landlord?

  • If you can afford the financial risk (you might lose a lot of money before making any profit)
  • If you own your own a home already (it is easier to get a buy-to-let mortgage if you already have your house)
  • If you have a good credit score and an annual income of over £25,000
  • If you are under a certain age (for example, under 70 years old, depending on the lender)

Stamp Duty

Starting 1 of April 2016, the Stamp Duty for a property buy-to-let is higher by 3%, comparative with a property bought for a personal residence. This rule might sound discouraging for first-time buyers, because the pocket gets emptier with thousands of pounds, depending on the house value. The new Stamp Duty tax for buy-to-let properties can go either way: stops the blooming market estate, therefore reduces the rental market or give a positive chance to a new buyer for a cheaper house, due to lack of competition. For properties with a value under £40,000, there is no buy-to-let Stamp Duty, but you can rarely find a house for this price.

Tax relief

Starting with 2017, the tax relief on mortgage payments for private landlords, specifically for the buy-to-let scheme, is cut from 40% to 20%, which means as a buy-to-let landlord, your investment will be higher than prior planned.

Buy-to-let to let is still a good investment, with the possibility of future profit, but at the same time, there are risks to consider before getting a mortgage, because if you cannot afford the payments, you will lose the house and the investment up until that point.

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