Updating post from Reddit.
Hi all, I was wondering if you could give me some advice. I’m not looking to build a portfolio or anything hence struggling a bit to find proper advice for my situation.
I have got a new built flat that I moved into about a year ago. It was not bought via ISA. I was however a first time buyer. I got a 2 year mortgage agreement at quite a high rate but needs must at the time so I needed to move. I’m adding all this info in case it is relevant. Apologies if it is not.
I met my partner after I had already paid my deposit for the flat, it was still getting built at the time. We are living in it just now. However, he sold his last house recently and is now looking to buy a new one where we could move into. The house mortgage will be in his name as mine is already on the flat’s.
Now, we were planning on renting out the flat when we moved to the house with hopes that it will pay for itself (or at least partially since the mortgage rate is 5.5%). I was trying to find some advice on how to go about doing this but I seem to find a lot of info and I can’t say it’s all relevant to us.
We don’t want to sell as we only got it a year ago and we will surely lose money on it. Plus it seems like a good asset to have.
From my hours of googling, what I think we need to do first is change the mortgage to Buy to Let. From what I can see that will increase the mortgage rate. Also by the sounds of it, we don’t need to wait for the 2 years to end as we can ask the bank to agree to let. Is this correct?
Then it seems like a lot of inspections are needed, agents etc..
I was wondering if people who are already landlords can give me a some real world advice as to how to best start this? Is letting it out the best idea? What would you do if you were in my position?
Thank you in advance!
Your mortgage company should have a consent to let, it’s usually 0.75-1.5% Uplift on your current mortgage rate and you have to rent it for about 150% of your mortgage payment depending on who your mortgage if with. Please be away the mortgage repayment it not tax deductible against the rental income (20% of the mortgage interest) and the rental income will be classed as income ontop of your salary so likely to be taxed at 40%. (Ie £1500 rent pcm = £900 after tax, not including any deductible interest)
Alright, so we stand no chance at renting it then… It’s a one bed flat with a bit under £800 mortgage. We were planning on renting it out for £650-£700.
I wouldn't think it be worth it based on your figures, too many cons for making tiny profit if at all mostly you will be at a loss with taxes, maintenance and fees. Let alone a potential headache with net zero and service charges then you will have rent reform creating more issues.
I hear you. Thank you for your advice! Would it be better to Airbnb it?
That will come with a whole heap of other expenses and issues, your lease might not allow for this, cleaning costs, some councils want you to obtain license for short term let's now. Probably need a different type of mortgage again, property management will be evem more handson with higher maintenance. Potential that neighbours will be pissed off if someone uses it for a party or adult work. Again I don't think it's a good enough property as an investment.
Feelings like a lose lose situation. We might need to bite the bullet and just sell the flat at a loss then. Assuming it sells. The developer is still selling flats in the building which will make it difficult.
Yeah I became a landlord but my LTV was 50% on the btl mortgage and was fixed when the interest was low for many years. I have ran the figures recently and I could have made far more and stress free via global fund investing for long term. Being a landlord on small amounts would not be a good investment as you are taking such a big responsibility and liabilities. Even running the accounts can be a pain. I see a lot of people on here bury their head in the sand around filing for taxes and the worry when HMRC asks for 5 years worth of taxes because the landlord didn't think they needed to do it or just ignored it to start with. Another thing I realised was the eviction process is long winded and awful especially for non paying tenants that trash the place so again more cons to think about. Student loan payments too if you have any and you earn enough then you will have to pay a portion to them. Empty home council tax some councils are charging double for empty homes. CGT - the longer you keep it and if it appreciates in value you could see all those years of being a landlord wiped out when you sell by the CGT tax. Also multiple home stamp duty you will be seen as multiple home owner for anytime you buy another property. Just so much to think of.
If you want to do it you need to run the figures of an interest only btl mortgage, figure out if the income and expenses will be worth it then remember that you only worked out best case scenario and that you will find reality is a lot worse.
Not necessarily. I'm going to guess that your current mortgage is a repayment (interest+capital) mortgage. For BTL, the calculation is normally based on the interest element (since many BTL mortgages are interest-only). If you have a current mortgage statement, take a look to see how much of your payment is the interest. The rent has to be a minimum of 125% of the mortgage interest (called the coverage ratio), but some lenders will require a higher percentage. It's also often calculated at a specific rate of interest.
If your existing mortgage lender offers BTL mortgages, I'd suggest sitting down with them and working through if it's possible - on the rent you could achieve and their coverage ratio, what does that mean for monthly interest payments, and therefore what size of BTL mortgage would they offer you. How does that then compare with your existing mortgage? Can you free up a bit of capital to cover the costs of moving to a BTL and other costs involved (including paying the mortgage for a few months while you find a tenant). If the maximum BTL is below your current mortgage, do you have the cash to pay down the difference? If not, then see if they'll allow you to rent with the consent to let as suggested above. This might be time limited, so see if you have to plan to switch to a BTL at some point in the future.
This is very good advice, thank you! Do you find it difficult to do the lump payment of the property value at the end of the mortgage term? With the way our mortgage was going I was hoping to keep overpaying and end it early, hence saving on interest. I’m assuming this isn’t the case for BTL as it seems to say you can only lower monthly payments but not the term.
I haven't hit the end of any of my mortgage terms yet. Most are about 15 years away still. My current plan is to use any after tax profits each year to chip away at the outstanding capital balance over time using some of the penalty-free 10% that can be paid off each year. As it's a BTL rather than residential, simply getting another mortgage is also a possibility at the end of the term.
Speak to your bank first about having consent to let under your current mortgage. This is typically only a small charge, where is the cost of changing to a buy to let mortgage will be quite a lot as interest rates are usually higher.
You’ll probably find that the ‘profit’ you make after you factor in all the expenses is less than the cost of the mortgage for the first couple of years, but if you can afford that then it could provide a nice extra income in the future with the potential for capital appreciation.
Great advice, thank you! That might be what we were looking to do. We are aware we won’t be making money off it right now. But even if we only spend £300-400 a month on it and get to own it afterwards I think that would be great for our long term plan and a nice little asset to have.
The only issue might be that we won’t be able to rent it out as per another commenter’s note that the rent needs to be 150% of the mortgage payments which won’t be possible for us unfortunately.
Sometimes its 125% of the mortgage amount. Also note it might be better to move your mortgage to an interest only BTL mortgage after the fixed 2 years is over. This way you might be able to meet the criteria of the 125/150%. However your LTV will have to be at 75% for a standard BTL mortgage. Some lenders may offers 80/85% but your interest rate will be very high. Hope this helps.
That’s really helpful, thanks! I need to look at these options. The interest only sounds like a right pain though.
How does it work if we want to give it to AirBnb? Assuming we still need a BTL mortgage. How is the 150% calculated then?
AirBnB are holiday let mortgages, not a BTL Mortgage. A total differnt area and type of mortgage.
Onlinemortgageadvisor.co.uk recommends a buy-to-let mortgage as we will be renting out the whole property. Would my assumption be accurate?
It's not about whether it's full or part of the property; Airbnb is for short-term rentals and requires a Holiday Let Mortgage.
In contrast, a Buy-to-Let Mortgage is only for renting under an Assured Shorthold Tenancy (AST), which has a minimum duration of six months.
Makes sense, thank you!
>From my hours of googling, what I think we need to do first is change the mortgage to Buy to Let. From what I can see that will increase the mortgage rate. Also by the sounds of it, we don’t need to wait for the 2 years to end as we can ask the bank to agree to let. Is this correct?
This is not incorrect.
However, 5.5% is a high rate even in BTL, you may be able to remortgage to a better mortgage rate. In addition if you do remortgage to a BTL you can put it on Interest Only, so the payments are less.
You may not have to wait two years (or remortgage). You can "ask," and your mortgage lender may grant you what they call "consent to let." They may refuse.
If the bank refuses, then again, you do not have to wait two years to remortgage to a buy-to-let. However, you will have to pay "Early Repayment Charges (ERCs)" to your current lender. They are not cheap.
I presume you are at a high loan-to-value. The maximum LTV on BTL is 85%; however, they are expensive until you get to 75% LTV. So, if you do remortgage to a BTL, you may need to put more deposit down if you are, for example, at 95% LTV.
You want to discuss your options with an FCA Authorised Mortgage Adviser.
Thank you! We’re at 89% LTV now so hoping to bring that down to 85 by the time we need to rent it out.
Is an interest only mortgage a good idea? I’ve never heard anything good about them.
Interest only for buy to let mortgages is very common. However interest only for residential mortgages is not common at all, hence you’ve probably not heard much of it if you are new to the BTL scene.
>bring that down to 85 by the time we need to rent it out
There is information on 85% LTV Buy-to-Let Mortgage, as you can see, they are not cheap. 6.44% for a 2-Year Fixed Rate with a 2% Fee.
First, do your sums. What will you be able to rent it for? How much will you need to put aside for repairs/voids/gas safety/landlord insurance? How much equity do you have in the flat?
Second, decide what your plans are for the flat - do you eventually want to own it outright? If yes, you will need to look at repayment deals, otherwise you can go for interest only. This will obviously massively affect your monthly payments and cash flow.
Next, talk to your mortgage company. Its almost 100% likely that you will not be permitted to rent it out without informing them, and they will probably want to switch you to a BtL mortgage. LtV on a BtL is often less than on an owner-occupier mortgage, and as you haven't owned it for long, you may not have the 30% equity they tend to look for.
When you've worked out the numbers, and know what your mortgage company is willing to do, you can make a proper decision. Good luck.
(Also, not the question and none of my business really, but think carefully about not putting your name on the other mortgage; if you pay towards it but don't have your name on it, and then things go pear shaped, you'll have nothing).