It is not surprising that a home in one of the most expensive cities is going to be one heck of an investment. But if you can buy a property in London, is it worth the investment, how good is that investment going to be in the long term and what should you expect?
What is a Buy-To-Let Mortgage and How Does It Work?
If you are looking to invest in a property, your journey may begin with a buy-to-let mortgage.
What exactly is a buy-to-let mortgage? It is a mortgage used to purchase property that you intend to rent out rather than live in yourself.
As opposed to residential mortgages, buy-to-let mortgages are considered a risky investment where lenders are concerned. This risk is rather obvious, a lender may not be assured that your property will receive the expected rental payments as planned or may not happen on time. For this reason, buy-to-let mortgages have higher interest rates with stricter criteria attached when obtaining them.
Let’s look at what is required when getting a buy-to-let mortgage and how your mortgage will be set up.
Criteria for a Buy-to-Let mortgage
Age – To obtain a buy-to-let mortgage you should be at least 21 years or over.
A good credit record – Similar to residential mortgages, a good credit record is crucial to proving your reliability.
Proof of Income – Unlike residential mortgages, the amount you can borrow in buy-to-let mortgages depends on how much rent you can earn rather than your personal income. Most lenders will look for an annual rental income that covers up to 125% of your annual mortgage interest payments.
However, if you are a first-time buyer a lender will look for a personal income of at least £25,000 a year.
Mortgage deposit – Buy-to-let mortgages require a larger deposit of 20% to 40% depending on the lender. Just like residential mortgages, the more desirable mortgage rates will depend on how high the deposit will be.
Loan-to-value ratio (LTV) – A loan-to-value ratio is another method used by lenders to determine borrower risk by evaluating how much money you are borrowing as opposed to the property value.
LTV is calculated by dividing the amount borrowed by the property value. The higher the number the more risk you pose to the lender. And the lower the number, the safer you are for the lender.
For example, if you were to take a mortgage for a property valued at £200,000 and your deposit was £40,000 (20%), which means you were to borrow £160,000 your LTV would be 80%
A low LTV is therefore tied to the amount you deposit. Such as a 25% deposit equals 75% LTV and a 30% deposit equals a 70% LTV and so on. 80% is considered to be the general threshold for LTV
Mortgage payments – Most buy-to-let mortgages are interest-only mortgages. This means that you pay the interest each month and pay the loan balance at the end of the term. Most often borrowers opt to sell the property at this point to pay off the debt.
What Should You Consider When Buying Investment Property?
Location – The more amenities and comforts a location offers the more valuable it will be. Factors such as proximity to essential amenities, well-ranking schools, transportation links, type of community, proximity to employment opportunities, and upcoming developments, contribute to the higher value of the property.
Potential for capital growth – The likelihood of your property increasing in value overtime. This can happen due to new property developments in the area that increase the value of your property as well.
Rental yield – The rental yield or buy-to-let yield is a percentage that offers a quick idea of your property’s profitability. It is also used to predict the property’s potential capital growth.
Rental yield is calculated by dividing your annual rental income from your property value, multiplied by 100%.
For example, If your property is £300,000 and your annual income is £19,200, your gross rental yield would be 6.4%.
Cost incurred – Investing in a rental property also means having to bear the cost of maintenance, repair, insurance and taxes.
What Can You Expect from Buy-to-Let Properties in London?
Demand – With the end of the pandemic, offices have reopened and people have returned to the capital, increasing the demand for rental property.. In 2023, more people are looking to rent rather than purchase their own homes due to the rising mortgage rates. Statistics on www.portico.com show that rental inquiries are rising to 23% in comparison to last year with studio flats rising in popularity.
Potential for capital growth – House prices have fluctuated in recent years, and property should be considered a long term investment
London is a high-demand zone for rental properties at all times. As a capital city, London possesses the amenities and requirements that make property a potentially worthwhile investment. If you are considering a buy-to-let mortgage, please give us a call to discuss further.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
Approved by The Openwork Partnership on 4th April 2023