Understanding the recent changes in buy-to-let rates with advice from a property litigation solicitor
Key Points:
- Property expert provides advice for potential investors considering entering the buy-to-let market
- Expert looks at key considerations when investing in buy-to-let properties, such as location, rental demand, property type, tax implications, mortgage options, and maintenance
- Expert advise that while reduced mortgage rates are appealing, investors must consider long-term sustainability before investing
The Mortgage Works, a division of Nationwide Building Society, has made headlines this week by reducing buy-to-let mortgage rates by up to 0.30 percentage points.
“The Mortgage Works specialises in providing buy-to-let mortgages, offering tailored products for landlords looking to purchase or remortgage rental properties. With new rates starting at 3.24% for selected products, this change may attract some new investors into the buy-to-let market,” says Alex Cook, a property litigation solicitor from Helix Law, a UK-based law firm specialising in complex litigation and dispute resolution.
However, entering this sector requires more than simply taking advantage of lower rates—it’s vital to approach the decision with thorough consideration and careful planning.
Below, Cook shares his advice for anyone considering investing in a buy-to-let property, showing would-be investors how to navigate the complexities of the market and make informed decisions.
1. Choosing The Right Location
“When it comes to buy-to-let investments, the location of your property can make or break your success,” says Cook. “To find the ideal spot, look for areas with strong rental demand, which are often characterised by good schools, convenient transport links, local amenities like shops and cafes, and proximity to employment hubs.”
Researching local property trends can also give you insight into future growth; don’t just consider what’s popular today—think about what might be in demand a few years down the line. For example, emerging areas near new transport links or regeneration zones can present great long-term investment opportunities.
2. Understanding Rental Demand
Once you’ve identified potential locations, it’s time to gauge rental demand. Investigate vacancy rates, local employment levels, and the general economic health of the area.
Websites like Rightmove, Zoopla and Spareroom can give you at least basic insights into current rental prices and how they’ve changed over time. You could also speak to local letting agents or property managers to get a clearer picture of what tenants in the area are looking for.
3. Selecting The Right Property Type
Not all properties are created equal, and the type of property you choose will impact the kind of tenants you attract.
“Flats tend to appeal more to younger professionals, especially in urban areas, while houses are often more suited to families or long-term tenants,” says Cook. “Consider whether you want a property that appeals to students, young professionals, families, or perhaps multiple tenants sharing.”
Think about the practicalities of maintaining the property type you choose, and anything relating to the area, specifically. A house with a garden may look great, but it could incur higher maintenance costs than a flat.
Properties with more bedrooms or communal spaces might be attractive to those looking for shared accommodation, while families may look for properties with gardens and extra storage.
Some types of property in certain locations can require a license, and there is no certainty you will be able to obtain one- so check this before taking any significant steps.
4. Understanding Tax Considerations
One key factor often overlooked by investors when diving into the buy-to-let market is the tax implications of owning rental properties. Beyond income tax on rental earnings, you’ll need to consider other taxes, such as stamp duty and capital gains tax when you sell the property.
The rules surrounding buy-to-let taxes have changed in recent years, and it’s vital to understand the tax landscape before you buy. For example, if you’re in a higher tax bracket, your rental income will be taxed at a higher rate.
“I’d highly recommend consulting with a specialist property accountant and/or tax advisor to help structure your investments in the most tax-efficient way,” says Cook. “They can also help you navigate any potential tax relief opportunities available for landlords, such as allowable expenses for repairs and maintenance.”
5. Planning For Future Rate Increases
While the recent rate cuts on buy-to-let mortgages might make for an attractive entry point, it’s important to factor in the potential for future interest rate rises. Interest rates are cyclical, and what may seem like a good deal today could become less favourable if rates rise in the future.
It’s wise to consider the long-term impact of a variable mortgage rate on your monthly outgoings. Keep in mind that higher interest rates could affect your profit margins, especially if rental income doesn’t keep pace with rising mortgage costs.
When budgeting, stress-test your finances by calculating how much your monthly payments would increase with a rise in interest rates. This can help you plan ahead and prepare for any future fluctuations.
6. Property Maintenance And Upkeep
“Owning a buy-to-let property comes with an ongoing responsibility to maintain the property, so it’s important to assess the level of upkeep required,” says Cook. “Newer properties generally offer lower maintenance costs and better energy efficiency but may have a higher service charge, while older properties usually require more frequent repairs, but make up for that in character and a lower initial purchase price.”
Be prepared for the cost of repairs, both expected and unexpected. A good maintenance plan is key to keeping your property in top condition, meaning it will continue to attract tenants.
“Maintaining a property is a fundamental obligation of a landlord and investor” confirms Alex. “There’s considerable obligations on a landlord to repair and maintain a property, sometimes even to what can feel like a higher standard than your own. Failures in this space can delay your ability to evict a non-paying tenant”.
7. Mortgage Considerations And Financing
“When purchasing a buy-to-let property, you’ll need to take out a buy-to-let mortgage, which differs from residential mortgages in a few key ways,” says Cook. “Lenders typically require a larger deposit for buy-to-let mortgages—often around 25% of the property’s value. You may also need to demonstrate that your rental income will cover at least 125–150% of your mortgage payments.”
Speak to a mortgage advisor to explore all available options, including fixed-rate or interest-only mortgages. Each option has different implications for your long-term financial strategy.
8. Protecting Your Investment
New investors often look at insurance policies to offer protection- for example rent guarantee insurance, or RGI. On paper this can cover you for a range of eventualities, including accidental damage by tenants, loss of rent if the property is unoccupied, and protection against non-payment of rent.
“I’m not especially persuaded by the benefits of RGI”, advises Cook. “Whilst on paper insuring against risk is attractive, these policies only tend to be available for lower risk tenants anyway and my experience is that more experienced landlords tend to self-insure. They’re relatively expensive in comparison to simply putting money aside monthly to cover possible future expenses (as with any business), and of course insurers are focussed on making money themselves” advises Cook.
He continues: “Often the best approach can be to secure a property owning guarantor- with a robust guarantee. That way if something goes wrong you have some recourse against someone with some skin in the game who has something to lose. Guarantors also tend to have a connection to the tenant and so where say the tenant might otherwise argue they have nothing to lose, it’s helpful if the same can’t be said for a guarantor.”
Consideration also needs to be given on whether to instruct an agent. Some landlords prefer to manage their property themselves, while others opt for a letting agent to handle day-to-day operations, including tenant vetting, rent collection, and property maintenance.
Alex Cook, a property litigation solicitor from Helix Law, commented:
“It remains an incredibly challenging market for Buy-To-Let investors and landlords. A succession of legislative changes, ranging from making evictions harder and more complex to enhanced tenant rights and protections to changes in the tax treatment of rental income, still combine to make this a difficult time. Whilst this rate change may help add to the appeal, it’s vital to consider all aspects before jumping in.
“This means looking at immediate affordability and assessing long-term sustainability and ROI on your money with financial and specialist advisers such as expert property investment accountants. Investors should remain prepared for potential interest rate increases in the future, and of course, the value of property can go down as well as up.
“Rental demand, property type, and tax implications all play a role in assessing whether buy-to-let property is an investment that will work for you. In the context where evictions are primed to become more difficult in the not too distant future, it becomes fundamentally important to be prepared, and to understand your compliance requirements and steps you can validly take when you need to.”
