At the height of the mortgage boom many people bought second properties with the aim of renting them out and making a good rental income as well as capital appreciation. When the credit crunch hit many people go their fingers burnt in this market as property values fell and they ended up with losses in equity and mortgage payments more than the rental income.
A few years on and property is again booming in terms of rental income and capital appreciation. The government has brough in new legislation with 3% extra stamp duty and a reduction in mortgage interest relief for higher rate tax payers. Finally the regulator has brough in new affordability requirements for lenders meaning a larger deposit is often needed to buy a new home.
Whilst there are now constraints for the industry in a low interest environment BTL still offer a good return on capital (ROC).
Return on capital is how long it takes to get the money back that you put in buying the property, meaning you end up with a property financed by a lender, making you a potential profit with none of your original money invested in it. Currently the most common buy to let mortgages involve clients putting down a 25% deposit.
A property is purchase for £100,000 including the costs of purchasing. A £30,000 deposit is put down. The mortgage costs £500 per month and the rent received is £750 per month. The profit is therefore £250 per month before tax or £3000 per annum. This equates to a 10% return on capital. (ROC). Ultimately if tax was not a consideration or any other costs then it would take 10 years to recover the initial capital invested.
There is an array of Buy to let mortgages in the market with various criterias one of the most notable disparities is the level of fees charged by the lender to set up the mortgage.
Often headline interest rates are accompanied by very high set up costs whilst seemingly worse rates may be better overall. A good independent mortgage broker will evaluate the overall cost and recommend the best deal overall not necessarily the lowest interest rate.
Any gain you make on a property that is not your main residence is subject to capital gains tax. A gain is considered the increase in value of the property since when it was purchased.
A Buy to let mortgage and multiple property ownership can therefore be a complex area of finance and therefore it is worthwhile speaking to an expert.