Banking 101 –

Funding Your Buy-to-Let

Buy-to-let property can be a good way to grow your wealth. Over the past few years, the UK housing market has shown remarkable resilience and increased demand is pushing up residential property prices in many parts of the UK. This guide answers some of the most common questions around buy-to-let. 

Published

22nd July 2021

Category

Terraced houses in Kensington, London

 

Why invest in a buy-to-let property?

There are several strong arguments for investing in property, the diversification of your investment portfolio is one of the main drivers. Traditionally, the property market has delivered safe and consistent growth while buy-to-let income can be a reliable extra revenue stream.

What is a good buy-to-let rental yield?

Generally, a rental yield of 7% or above is considered very good. The rental yield is the measure of how much cash your property generates via rental payments expressed as a percentage of that asset’s fair market value. For example, a two-bedroom apartment in south London costing £300,000 - renting at £1800/ month equals a 7.2% yield.

What is the tax relief on buy-to-let mortgages?

Since a rule change in April 2020, private landlords receive a tax credit on 20% of mortgage interest payments. This is based on the basic tax rate, so may be less if you are a higher earner. It is also important to check if your buy-to-let income will push you into a higher or additional rate tax band.

Can you change your residential mortgage to a buy-to-let mortgage?

Yes, speak to your mortgage broker or financial advisor about making the change and what extra criteria you may need to fulfil. If you have lived in your property first, this can help reduce your capital gains tax liability if and when you decide to sell.

How much should I borrow?

Buy-to-let investors tend to have larger deposits than homebuyers. At Arbuthnot Latham, we see investors borrowing up to 65% of a property’s value. Larger deposits of 30-40% can mean the loan to value (LTV) is more attractive to mortgage lenders and thus attracts lower interest rates.

 

 

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