Is Buy to Let Worth it?

Historically, investing in UK property has provided many benefits, but recently a lot has changed and that begs the question, is Buy to Let worth it? 

Whether you're looking to generate additional income, build wealth for retirement, or simply enjoy the process of flipping houses, Buy to Let can seem enticing.

However, it's crucial to approach this investment avenue with caution and conduct thorough market research before making any decisions.

In this insight, we explore the question, is buy to let worth it, considering the costs you can expect to face in 2023.

Key Takeaways

• Buy to Let can be worth it for long-term investors, but thorough market research and caution are essential.
• Higher interest rates have reduced profits, making it advisable to raise a larger deposit if possible.
• Buying to let in your personal name requires paying tax on the full income, while Limited Company Buy to Let mortgages are harder to get approved.
• Buy-to-let mortgages are typically more expensive and have stricter lending criteria than residential mortgages, so careful consideration and comparison of options is necessary.

In the UK, buy-to-let investing involves purchasing a property with the intention of renting it out to tenants. The investor, or "landlord," collects rental income from the tenants and is responsible for maintaining the property to a habitable standard.
 
One of the main benefits of Buy to Let mortgages is the ability to leverage finance, after all, not everyone has £250,000 sitting in their bank accounts. So how practical is it to obtain the mortgage?

Buy to Let Mortgages

It's important to note that buy-to-let mortgages are typically more expensive and have stricter lending criteria than residential mortgages, so it's important to compare options and carefully consider your ability to manage the property and generate sufficient rental income. 

Criteria

Different lenders set different lending policies and affordability rules. When reviewing the buy-to-let market, speaking to a Mortgage adviser with whole of market experience will provide you access to a wider range of lenders. 
 
A Mortgage adviser will be able to assess your circumstances and have a better chance of finding the most relevant lender who is better placed to accept your application. Saving you a lot of time researching on your own!
 
To give yourself the best chance of being accepted, you're going to need to make a strong case against the following criteria, however, if you fail on one part it does not necessarily mean that there isn't a lender out there who would help you.

Your creditworthiness

Lenders will typically review your credit scoring history, income, and assets to determine your ability to repay the mortgage. 
 
Have you had any previous bad debts? How has this impacted your credit score? It's likely that lenders will not assist until you can get it cleared up. No issues? Great. Let's move on. 

Property ownership experience 

Some lenders may require that you have previous experience as a property owner. This means, for some, you cannot be buying to let as a first time buyer. 

Your overall financial situation

Lenders still run affordability assessments. They need to know that if the property is vacant, you will be able to afford the mortgage payments. To do this, the lenders will consider your overall financial picture, including any existing debts or liabilities. Plus, you will be expected to verify this income. If you're employed, that’s payslips, if you're self-employed SA302s are the best option.

• The minimum age is 18 however, some lenders require that you must be 21 or older. The lenders who do accept those under 21 are the ones who take on more risk and you may find yourself paying a higher interest rate as a result. 
• Some lenders require that you're not a first time buyer, if you are consider your alternative buy to let first time buyer options.
• Although your personal income is being assessed, lenders also require that they assess whether the Buy to Let is "self-financing". Typically, they require that the property generates at least 125% of the mortgage payment in rental income for your application to qualify.
• Value of the property: To check your application figures are genuine and in line with the market, the lender will conduct a valuation of the property. You will need to pay for this as the borrower.
• Minimum deposit of 25%: 25-40% are considered appropriate deposits. It's worth noting that if you have a lower deposit, your repayments will be higher, and this could impact whether the property is self-financing. 

Is Buy to Let Worth It: The Costs

When considering a buy-to-let investment in the UK, there are several costs and expenses to consider, including: 

• The initial purchase price of the property
• Stamp duty surcharge
• Survey costs
• Mortgage fees
• Conveyancing
• Mortgage repayments
• Property maintenance and repairs
• Landlord insurance
• Finder’s fee
• Ongoing expenses
• Tax

And finally, not to forget, the costs of furnishing a buy to let.

Let's break these down.

The initial purchase price of a Buy to Let property.

According to the office of national statistics, the average UK house price was £296,000 in August 2022. As you need to raise a deposit of 25%, that's £74k deposit. However, let's get real, you're probably going to be buying for a lot cheaper, for the benefit of our calculations, let's assume a property of £200k.

£50k deposit needed.

Buy to Let Survey costs

The cost of a property survey can vary depending on the size and type of the property, as well as the location and the level of detail required. 
 
A basic house report, which provides a high-level overview of the property's condition, may cost around £250-£500, while a full building survey, which includes a detailed inspection of the property's structure and systems, can cost upwards of £1,000.
 
It's important to consider the cost of a property survey when budgeting for a buy-to-let investment, as it can provide valuable information and help to avoid unexpected costs down the line.

£1,000 survey fee.

Buy to Let Mortgage fees

Many mortgage advisers do charge for their time and service, however, if you have a straightforward application as per the criteria, you're not going to need to do that and should be able to find an adviser without paying a fee. 

However, when arranging a buy-to-let, you are going to need to pay an upfront mortgage fee to the lender. This is a standard product fee in the industry and is usually £500-£1500.

Paying a larger fee would normally entitle you to a lower interest rate. It is exceptionally rare that lenders do not have a buy-to-let product fee, but not out of the question.

£1,000 Mortgage product fee. 

Buy to Let stamp duty

As you are buying a buy-to-let, the chances are this is not your only property. If this is the case, you are going to need to pay second home stamp duty 3% on top of normal stamp duty rates. 
 
On a property of £200,000, that works out to £6,000 upfront

Buy to Let stamp duty including surcharge: £6,000.

Buy to Let Conveyancing

Just like when you purchased your residential property, there is going to be legal work to get through. This is known as conveyancing. The cost will be around £1,000. Your mortgage adviser will be able to assist with appointing you a conveyancer.

£1,000 conveyancing fee.

Buy to Let Mortgage repayments

The beauty of a buy-to-let mortgage, and maybe its only saving grace, is that buy-to-let mortgages are generally accepted on Interest only terms, without needing a repayment vehicle. 

In terms of your application, an interest-only mortgage means two things:

• You only pay the interest on your loan each month. Your payments are less. You have a better chance of making a buy to let investment profitable.
• Your application is more likely to be accepted as your rental income will have a better chance of being 125% of your repayments.

Assuming an average interest rate for 75% LTV, your interest rate would be 4.19%, at the time of writing. On a Mortgage of £150,000. That is equal to £524 per month. 
 
If you want to ensure your mortgage is repaid fully before the end date, entertaining a repayment mortgage would cost £733 over a 30-year term. 
 
To have this loan approved, you will need to achieve a rental valuation of £917 per month. If this does not work out, you may be able to discuss with your lender the opportunity to overpay. Most mortgages have an annual 10% allowance. It could be that you opt for Interest only, whilst overpaying, to be able to give you some flexibility.
 
Ongoing cost:

Interest only: £524
Repayment: £733

Buy to Let Property maintenance and repairs cost

Whether you are buying a new or old property, there is always something that can go wrong or something to update. 
 
On average, a Brit spends £10,000 on renovations after buying a property. This is buy-to-let though, and hopefully, you can find a property that is nearly ready to let. For the sake of our calculations, let's assume the cost of a new £3,000 kitchen. Plus, an ongoing cost of £1,000 per year. Obviously, it's difficult to pinpoint an accurate figure as all properties differ and you never know what is around the corner!

Property maintenance: £3,000 upfront.
Ongoing repairs: £1,000 per year

Landlord insurance 

It is not a legal obligation to have landlord insurance, but it is advisable. Things can go wrong with letting your property and it’s a good idea to ensure you have appropriate cover.
If you have a buy-to-let mortgage, it is likely that the lender will insist that you have a landlord's home insurance policy in place.

Landlord insurance £400 per year.

Buy to Let Finder's fee

For the sake of weighing up whether buy-to-let's are worth it, we are going to assume you can run the ongoing management of the property & tenant yourself. 
 
If you are not able to do this, letting agents can be known to ask for up to 10% of your monthly rental income to manage.
 
Despite this, you are still going to need to find a tenant, as well as perform certain checks to ensure they are trusted. Unless you know of someone personally (which would be a win), you can employ a letting agent to find someone for you.

Finder fee: £250 upfront.

Ongoing Buy to Let Fees

If you decide to manage the property yourself, you may find yourself needing support or appropriate landlord documents written, such as tenancy agreements. There are landlord associations that you can join for a small fee, that provide templates. It roughly costs £10 a month.

Ongoing: £10.

Buy to Let Total Costs:

Upfront excluding deposit: £12,650
Including deposit: £62,650
Ongoing costs: £1,410

Is Buy to Let Worth it for Profit?

Let's delve into the total costs and potential profits associated with a Buy-to-Let investment, taking a mathematical approach. Suppose you acquire a property worth £200,000 with a 25% deposit. In this scenario, we estimate your upfront costs to be £62,650, with ongoing expenses amounting to £1,410.

Now, let's factor in the mortgage repayments to calculate your monthly costs. For an interest-only mortgage, the calculation would be £524 + (£1,410/12 months) = £641.5. With a repayment mortgage, the calculation becomes £733 + (1,410/12 months) = £850.5.

If you decide to rent out the £200,000 property, the expected rental income would range between £800 and £1,000 per month, depending on the location.

Let's consider the monthly Buy to Let income before tax, including the ongoing fees, based on our estimates:

For interest-only: £900 - £641 = £259 per month
For repayment: £900 - £850.5 = £49.5 per month

With an upfront cost of £12,650, it would take an estimated 48 months to break even on interest-only terms. On repayment terms, this period would extend to 255 months.

In other words, with an interest-only mortgage, it would take approximately 4 years to break even and start earning an additional £259 per month (pre-tax).

Now, let's explore the profit potential of a repayment mortgage over the long term. If you commit to the full 30-year term, you would eventually pay off the entire mortgage, leaving you with a property you own outright. Assuming no changes in house prices, this would translate to a profit of £200,000 (property value) minus your deposit and upfront costs, resulting in a £137,350 profit.

To replicate these gains in a savings account, you would need to invest your £50,000 with an initial cost of £12,650 to earn a 3.4% annual return.

It is worth considering the option of purchasing with limited company buy to lets, as there may be tax advantages associated with this approach.

What are the Buy to Let considerations?

This insight isn't telling the full picture of being a landlord. It's a lot of work. Probably a lot more work than simply putting your money into an investment. There are a few other considerations we haven't begun to scratch the surface of. Some of these we cannot quantify, such as, what is the cost of stress or time?

• A high turnover of tenants will add more costs
• Tenants can be troublesome, and you may need to call upon legal action
• Property values could fall
• Mortgage rates could increase
• You may be liable for capital gains tax
• There might be general tax changes that impact what you can claim.
• Your funds are tied up until you sell.
• Vacant periods without income.

Is Buy to Let worth it in 2023?

The answer to this question requires careful consideration. While buy-to-let investments may not seem as appealing as they once were and carry inherent risks, they can still prove profitable if approached with patience and proper planning.

It is important to acknowledge that buy-to-let investments come with a level of uncertainty and limited control over various factors that can potentially incur significant costs. Therefore, before making a decision, it is strongly advised to consult with a financial adviser. By discussing your long-term savings goals and understanding what you aim to achieve through a buy-to-let investment, you can gain a clearer perspective on whether it aligns with your objectives. Additionally, exploring alternative options for maximising your savings or securing a retirement income may be worthwhile considerations.

Given the complexities and potential pitfalls associated with purchasing a buy-to-let property in 2023, seeking professional advice becomes paramount. Consulting with an expert will help you make an informed decision and navigate the intricacies of this investment strategy effectively.

So, is buy to let worth it? If you're still unsure complete the Sunny Avenue Fact Find, we use your answers to find the best-suited adviser for you. Your adviser then makes contact for a no-obligation chat on how they can help, you decide how to proceed.