Recently, the UK’s housing market has a strong record of increasing in value year-on-year.
Many people are considering renting out their property to take advantage of this.
If you’re wondering what buy-to-let is and how it works, you’re in the right place.
What is buy-to-let?
Buy-to-let means that you buy a property with the intention of renting it out to tenants.
You have no plan to live there yourself. Your contract will thus prevent you from doing so.
It’s a common route chosen by property investors who want to generate income from being a landlord.
Buy-to-let mortgages
A buy-to-let mortgage is usually interest-only.
So, you don’t pay off the full mortgage, only the interest on the loan, which keeps monthly payments relatively low.
You can also switch from a residential mortgage to a buy-to-let mortgage via consent-to-let permission from your lender.
When you eventually sell your buy-to-let property, you have three options to choose from. You can:
- Selling the property (with or without sitting tenants)
- Remortgage it
- Pay off the loan in full.
How many buy-to-let mortgages can I have?
You can have multiple buy-to-let mortgages. Many property investors take out several.
However, each lender or bank might limit the amount of money you can borrow from them.
So if and when you reach your limit with a bank, you’ll need to find another one to borrow from.
You should speak to your lender directly for details about this.
Advantages of buy-to-let
Flexibility
There is no overall limit to how many buy-to-let mortgages you can take out.
You also have the flexibility to change your mortgage type if you wish. You can transition to a residential mortgage if your situation changes.
Earning potential
You can often increase your month-on-month earnings compared to a typical residential mortgage.
This is because you only pay back the interest on a buy-to-let, rather than the whole thing. Your monthly outgoings are thus smaller.
Investment potential
Buy-to-let is often a wise investment. This is especially true in the centre of major cities, where many people are keen to rent.
And as mentioned above, you can buy the property outright, or remortgage it, at the end of your buy to let term. This means that you can keep ownership of your house.
Disadvantages of buy-to-let
Conditions of mortgage
You are not allowed to live in a buy-to-let house yourself. Almost all lenders have this condition.
You should thus only take out this mortgage if you have another place to live.
You can’t use it as a ‘fall back option’ if you fall onto hard times, unless you change the mortgage type, which comes with its own challenges.
Work involved
Buy to Let ownership is far from passive income, as some people suggest. You will face all the challenges of being a landlord.
Some tenants will cause problems. They might damage the property or not pay rent on time. They might also have disputes with neighbours or break the terms of your agreement.
You have a long list of responsibilities, including:
- Fixing heating and plumbing
- Painting and re-painting the property
- Garden maintenance.
And much more.
These scenarios involve time, money, effort and stress for landlords.
(However, you can pay a letting company to manage the property on your behalf.)
High deposit needed
Finally, buy-to-let mortgages need a higher deposit. Almost all UK lenders demand this. In most cases, a 25% deposit is required.
You’ll need to save up this much if you want to explore the buy-to-let route.
The current UK buy-to-let market
Based on new lets, the average monthly rent price in the UK is currently £1,245.
In the most recent calendar year, rent prices are expected to have risen by between 3% to 4%. This is mainly due to the high demand and low supply for rental properties, especially in urban areas.
Statistics demonstrate that rent prices are rising the fastest in the suburbs of major cities.
This is because inflation is decelerating in the centre of cities, where residents have already reached the limit of what they can pay.
Is now a good time to invest in buy-to-let?
Most experts predict that the UK rental market will grow over the next 12 months.
Interest rates are also slowly declining, meaning buy-to-let mortgages are more affordable now than 6 months ago.
Some property landlords are waiting for interest rates to go down even further before they invest further in buy-to-let.
Indeed, most house owners focus on solidifying their existing portfolio rather than growing it.
Many landlords suspect 2025 will be a good time to invest if interest rates decline.
