Over the past decade, the UK’s housing market has a strong record of increasing in value year-on-year.
As a result, investing in property has become more popular.
Read on if you’re wondering what buy-to-let is and how it works.
What is buy to Let?
Buy-to-let (BTL) is when you buy a property with the intention of renting it out to tenants.
You have no plan to live there yourself – and your contract will thus prevent you from doing so.
It’s a familiar 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.
This means that you don’t pay off the full mortgage, only the interest on the loan. So, your monthly payments tend to be lower.
When you eventually sell your buy-to-let property, you have three options to choose from. You can:
- Sell the house to a buyer
- Remortgage it
- Repay the loan in full.
How many buy-to-let mortgages can I have?
You can have as many buy-to-let mortgages as you want. Many property investors take out several, allowing them to build an extensive portfolio.
However, remember that each lender or bank might limit the amount of money you can borrow from them.
You should speak to your lender directly for details about this. They implement this policy because it reduces their risk.
Once you reach your limit with a bank, you’ll need to find another one to borrow from if you wish to keep expanding your property portfolio.
Advantages of buy-to-let
There are several advantages to a buy-to-let mortgage.
1. Scalability
Firstly, there is no limit to the amount you can take out.
Each bank might limit you, but you can always go elsewhere to expand your portfolio.
2. Increased earnings
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.
3. A good investment
Buy-to-let is often a wise investment in the centre of major cities.
Most people in these areas are keen to rent, and you may attract numerous potential tenants if you price it fairly.
4. Flexibility
You also have the flexibility to change your mortgage type if you wish. You can transition to a residential mortgage if your situation changes.
As mentioned above, you can buy or remortgage the property at the end of your buy-to-let term. This means that you can keep ownership of your house.
Disadvantages of buy-to-let
1. You can’t live in your buy-to-let property
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 fallback option if you fall onto hard times unless you change the mortgage type, which comes with its own challenges.
2. Landlord challenges
Buy-to-let ownership is far from passive income, as some people suggest. You will face all the challenges of being a landlord.
Tenants will sometimes not pay on time or cause damage to the property. They might also fall out with the neighbours or break the terms of your agreement.
Fixing items in the property tends to fall onto your lap, too. All of these scenarios involve time, money and effort.
3. High deposit needed
Finally, buy-to-let mortgages need a higher deposit than regular mortgages. Almost all UK lenders demand this.
In most cases, a 25% deposit is needed. You’ll need to save up this much if you want to explore the buy-to-let route.
The state of the UK buy-to-let market currently
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 largely due to the high demand and low supply of 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 twelve 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 the best investment time once interest rates have declined.
This is especially prudent as the long-term policies and laws set out by the Labour government continue to be slowly announced.