Buy-to-let Most buy-to-let mortgages require a minimum of 15% deposit and are usually based on the rental income of the property, not the income of the investor. It is prudent to ensure that rental income represents between 125% and 150% of mortgage repayments, and indeed some lenders insist on this. The Association of Residential Letting Agents (ARLA) expects that the private rental sector will grow from its current level of around 11% of the housing market up to 20% by the year 2020. One reason for this is the increase in the number of single persons and single-parent families wanting rented accommodation. ARLA further suggests that with people living longer, with less predictable income flows, there will also be a trend for them to rent in the later part of their adult lives. Buy-to-let: points to consider Pick your area Location of the property is very important. Factors to consider are closeness to local amenities or major employers. A letting agent can be a useful source of information. They should have specific knowledge on the local level of demand, the type of properties that are sought after, and popular areas. Check the overheads It is important to check whether there are any service charges on the property. These can easily run to a couple of thousand pounds and need to be taken into account on top of the mortgage payments. In the case of leasehold properties, there will normally be a ground rent to be considered. Factor in maintenance costs It is also necessary to allow for maintenance costs and insurance premiums. If the property is to be let furnished, all furnishings must comply with rigorous safety standards and the cost of this must be accommodated for. A prudent investor will also allow in their calculations for any likely period when the property is not let and therefore producing no income. Allow for agency fees If an agent is employed to manage the property, their charges may vary from 10% to 15% of gross rental income. Buy-to-let mortgages Most people buying-to-let will need to take out a specialist mortgage. You may also need to put down a reasonable deposit - most lenders in this market will require at least 15% as a down payment, although many lenders can ask for up to 25%. The good news is there is now more choice in the buy-to-let mortgage market. Previously, landlords were forced to take out commercial mortgages that were more expensive, but nowadays almost every high street lender offers a buy-to-let mortgage of sorts. If you have substantial equity in your own home, you may be able to look at remortgaging this and so obtain the funds to take out a small buy-to-let mortgage. Buy-to-let mortgages are usually more expensive, although deals do vary. While you can expect to pay more than for your own residence, there are some competitive fixed and discounted buy-to-let offers around. Lenders take different approaches, some will base the mortgage on your income in addition to the amount of rent they estimate can be obtained. Others will base the loan purely on the rental. The formula they use will also vary. Typically a lender will require the rent to be at least 125% of the mortgage payment. Others will offer a three times' salary multiple and half the rental income. Again, because of the tax implications, obtaining advice is necessary for those who are new to the market. Any interest you pay on a mortgage can be offset against tax, but capital payments cannot. This means it can make sense to have an interest-only mortgage, even though these are often not viewed as favourably as repayment loans. But if you want the property primarily for capital growth and want the loan repaid by a certain time - when you retire, for example - then a repayment mortgage may be more appropriate. If your first investment is a success, then you may want to become a property mogul. Some lenders will provide up to 10 or more mortgages if they are confident the properties are well managed and the returns are good. Article date: July 2006

Articles are copyright protected Goldmine Publishing Limited 2006. Terms and conditions apply. Unauthorised duplication or distribution is strictly forbidden.