Buy to Let Right for Under 25’s?

Buy to Let Right for Under 25’s?

December 22, 2016

Is Buy to Let Right for Under 25s?

Purchasing property has long been held as one of the safest investments to make. The phrase “safe as houses” reflects what’s seen as the rock-solid dependability of real estate as a reliable investment, and with house prices doing nothing but rising in recent years there’s good cause to believe that real estate investment is a great choice.

Becoming a landlord is, similarly, held to be a sensible investment. Not only can this provide a decent income, but it subsidises the mortgage on the property. This means that as the years go by, the property becomes a more and more valuable asset, which can be extremely valuable.

For young people, it might seem as if buy to let properties are a smart investment; property prices are going up, and if you’re able to rent out the house as well, you can subsidise the mortgage and reap the rewards of a buoyant real estate market. However, there are certain conditions to funding a buy to let purchase which can make investing in buy to let at a young age unaffordable.

Costs of Buy to Let Mortgages

Unless you’re very lucky you’ll be taking out a mortgage to fund the purchase of your investment (and honestly, if you can buy a house outright before you’re 25 you probably don’t need to become a private landlord). Mortgages for buy to let properties differ substantially from those for residential properties:

Bigger Deposit, Lower LTV: Buy to let mortgages typically require a 20% deposit, and many lenders specify 25% as the minimum acceptable amount. This means you’ll need to stump up a considerable amount of cash up front.

Higher Fees: Generally, a buy to let mortgage will attract higher arrangement fees than a residential one.

Salary Requirements: Most mortgage providers will want to see that you’re earning at least £25,000 per year before they approve your application. This can be tricky if you’re just starting your career, and haven’t had time to work your way up the ladder yet.

Rental Income: Banks need to know that you’ll be making enough money from rent to cover the mortgage repayments, and will need to see that you’re making 125% of your annual mortgage costs in rent every year.

The takeaway from this is that, essentially, everything about a buy to let mortgage is more expensive. This is why there’s the perception that buy to let purchasers are outbidding private buyers; it’s really only possible to take on a buy to let property if you have substantial finances in place.

Changes to Buy to Let Regulations

Buy to let properties are a subset of the real estate market which have come under intense scrutiny in recent years. The competition between buy to let landlords and private homeowners for the same property has led to the perception that “real people” are unable to compete for houses, and are being forced into cheaper areas of the market.

To combat this, the UK Government has introduced a series of measures designed to level the playing field, making buy to let property a less attractive investment:

Higher Rental Income Requirements: From 2017, banks will want to see that you’re bringing in 145% of your mortgage payments in rental income each year. This leaves you with two options; either charge more for rent, or secure a better deal on your mortgage by getting a larger deposit.

Reduction of Tax Cover: Up until 2017, landlords could deduct the money they spent on their mortgage from their rental income, and only pay tax on the remainder. However, this will be reduced so that only 20% of their rental income can be deducted – tax will have to be paid on the rest. This means that professional landlords will see their tax bills increase significantly, making buy to let a much less attractive proposition.

Stamp Duty Surcharge: This doesn’t affect the purchase of your first property, but if you decide to buy a second property (either to rent or to live in), you’ll have to pay an additional 3% of the property value in Stamp Duty – that’s £7,500 on a £250,000 house, plus the regular Stamp Duty return.

Is Buy to Let the Right Call?

To make a Buy to Let property work for you, you need substantial earnings to back you up. Otherwise, you’ll struggle to attract a good mortgage with a low interest rate, and won’t be able to make a profit on your property. However, that’s not to say that it isn’t possible. It certainly is achievable, and for the right investor Buy to Let can be a great option.