How To Buy to Let – 2024 Advice Guide for UK Landlords

how to buy to let: two front doors

Knowing how to buy to let in the UK can be daunting. If you’re a first-time investor, you may not know where to begin. Even for experienced landlords, the buy-to-let process can be overwhelming as the rules and regulations regarding letting out a property are changing all the time.

If you’re thinking of becoming a landlord, there are a few things you should know beforehand. From mortgages and deposits to calculating your monthly rent and return on investment – this article gives you everything you need to start your buy-to-let journey.

What is a buy-to-let?

A buy-to-let (BTL) property is a residential property purposely bought to be rented out. Most buy-to-let properties will require a buy-to-let mortgage – a mortgage specifically created for the purchasing a property to let.

Not all rental properties are initially bought as a buy-to-let. Some landlords inherit a property, or buy a property to live in, but decide to rent it later on. In this case, the landlord must make their mortgage lender aware – and switch their mortgage to a buy-to-let.

Read the latest: 12 Things Landlords Can Expect from 2023

What is a buy-to-let mortgage?

A buy-to-let mortgage is a mortgage designed for buying a property with the intention of renting it out. The borrowing amount on a buy-to-let mortgage usually depends on the rental income you expect to earn, and the deposit amount is typically higher than a residential mortgage.

If you already have a property on a residential mortgage but want to start letting it – you must contact your mortgage provider to get consent to let or switch to a buy-to-let mortgage. Even if you’re looking for a short-term let, you’ll need to check it doesn’t go against your mortgage terms. Mortgage broker Sheryl Kirk from Buy to Let Direct explains:

A residential mortgage is secured against the home in which you and your family will reside, where as a buy to let mortgage is for investment purposes. The mortgage will be secured against the property in either scenario, but the terms of the mortgage will differ depending on the type of mortgage. The requirements are different: a buy to let mortgage is assessed based on the estimated rental income it will receive, whereas a residential mortgage is based on personal affordability.

Renting with the wrong mortgage or without consent to let is a breach of your mortgage contract.

“It’s very important to make sure you have the right mortgage in place for your circumstances. If you were to rent out a property on a residential mortgage without the lender’s permission, then you are likely to breach the terms of the mortgage. Lenders will view this as mortgage fraud. In this instance, the lender could demand you repay the mortgage in full or repossess the property.

For this reason, you need to ensure your plans to rent out the property are clearly outlined when you apply for your mortgage, or contact your lender to get consent to let to switch your mortgage over.

How much can I borrow for a buy-to-let?

Most mortgage lenders will require your rental income to be more than your monthly mortgage payments by at least 25% to 45%. This is also known as ‘rental cover’ – ensuring you have extra cash to pay your mortgage during potential void periods. 

The amount you can borrow will also depend on your income, affordability and financial history. If you have some outstanding debts, your available borrowing amount may be lower. 

You should consider how much you want to borrow in comparison to the property’s value, otherwise known as loan-to-value or LTV. Mortgages with an LTV over 75% are difficult to come by – and usually require a hefty deposit. 

How much is a deposit for a buy-to-let?

Deposits for buy-to-lets tend to be bigger than a standard residential mortgage. Most lenders ask for a minimum of 20-25%, whereas some require up to 40%.

Buy-to-let mortgages with smaller deposits are available, but the interest and fees will be considerably higher.

What fees are there to pay with a buy-to-let mortgage?

There are a few fees that come with a buy-to-let mortgage:

  • Mortgage broker fees
  • Lender arrangement and booking fees
  • Valuation fees
  • Legal fees
  • Early repayment fees
  • Mortgage exit fees

Buy-to-let mortgage broker fees

Some mortgage brokers charge for their services. This includes searching the market to find a buy-to-let mortgage that suits you and securing a mortgage offer. Some brokers don’t charge at all, whereas some will only charge once a successful offer is received. 

Typical fees range from £400 to £1,000 depending on the loan, product and whether you already have a mortgage. Fees for second mortgages tend to be higher than a standard residential mortgage. 

Lender arrangement and booking fees

Lender arrangement fees are usually charged by the bank or building society before your application. Some lenders have a flat fee, whilst others work on a percentage – usually between 0.5% and 2%. Some lenders will allow you to add the arrangement fee to the loan, whereas some will not charge at all. 

Some banks and building societies charge a booking fee, which allows you to secure a specific mortgage rate for a period of time. 

Buy-to-let valuation fees

Valuation fees usually depend on the value of the property. Mortgage lenders require a valuation to ensure the property value exceeds the loan amount you’re requesting.

Some lenders include a free basic valuation in the mortgage package, whilst others charge a percentage based on the value and size of the property.

Legal fees

As with any property purchase, there will be solicitor conveyancing fees. This includes all the legal administration for the property, including searches and registration with the Land Registry. These fees can vary, depending on the solicitor you’re using and the level of service they provide – typically ranging from around £1,200 to over £3,000.

Buy-to-let early repayment fees

Early repayment charges for a buy-to-let mortgage are a calculated percentage, based on the amount you’ve borrowed and how far you are into your mortgage. The usual fee is between 1% and 5%. The further you are into your mortgage deal, the lower the fee tends to be.

Buy-to-let mortgage exit fees

If you decide to close your account with your mortgage provider, you may be charged an exit fee. This covers the administrative costs of closing your account. The fee is determined by the provider and can range from £75 to £300, although some are free.

What taxes will I pay with a buy-to-let?

All landlords must pay tax on their rental income. The rent must be declared in your Self Assessment tax return and the amount of tax you pay depends on how much you earn. 

Rental income includes the rent, but also other payments from tenants, such as utility bills. For example, if you charge £1,000 rent inclusive of bills, this whole amount will be recognised as income – but some costs can be deducted as expenses.

Deductible expenses include:

  • Landlord insurance
  • Mortgage interest (soon to be phased out)
  • Costs of contractors and services
  • Letting agent or property management fees
  • Accountant fees
  • Ground rents and service charges
  • Water, gas and electricity bills
  • Council tax

Any deducted expenses should be incurred exclusively from letting your property. If you only let out part of your home or only let it during certain times of the year, you must apportion your expenses accordingly.

You can’t deduct expenses that add value to the property, such as an extension or renovation work, however, this could be deducted from Capital Gains Tax if you sell the property later on.

Buy-to-let taxes: Stamp Duty

When purchasing a buy-to-let, you will have to pay Stamp Duty Land Tax. The Stamp Duty rates for buy-to-let properties are:

  • 3% up to £125,000
  • 5% between £125,001 and £250,000
  • 8% between £250,001 and £925,000
  • 13% between £925,001 and £1.5 million
  • 15% above £1.5 million

This also applies to second homes and holiday homes.

Learn more about Stamp Duty Land Tax.

Buy-to-let taxes: Capital Gains Tax

When selling a buy-to-let property, you may need to pay capital gains tax on the profit. This is a tax on the profit you make from the sale, not the amount you sell the property for.

To work out your total gain, simply take the sold amount, then deduct the price you paid for the property, plus any other costs incurred from buying or selling the property.

All taxpayers have an annual capital gains tax allowance of £12,300. This will stay the same for 2022-23. Basic-rate taxpayers must pay 18% on gains made from selling a property. Higher and additional rate taxpayers pay 28%. 

Where is the best place to purchase a buy-to-let?

Deciding where to purchase a property is as important as the property itself – if not more.

The ideal location firstly depends on how local you want to be to your property. If you want to hand the keys over to an agency, you can pick wherever you like. But if you want to be involved in choosing your tenant and conducting viewings – a 30-minute radius is a good starting point for your buy-to-let property search.

According to Aldermore’s Buy to Let Tracker, Bristol is the best city in the UK for buy-to-let investment. The tracker takes into account:

  • Average total rent
  • Short-term returns through yield
  • Long-term return through house price growth
  • Lowest number of vacancies
  • Percentage of the population in the rental market

With all these factors considered, Bristol came out on top, followed by Oxford, Cambridge, Manchester and Luton. London has slipped down the ranks since 2020, but remains in sixth place due to its market potential and high proportion of private renters.

Top ten buy-to-let locations in UK

  1. Bristol
  2. Oxford
  3. Cambridge
  4. Manchester
  5. Luton
  6. London
  7. Northampton
  8. Brighton
  9. Reading
  10. Norwich

(Source: Aldermore’s Buy to Let City Tracker’s Top 10 Cities)

Who should I rent to?

Choosing your target tenants really depends on what your property has to offer and what local demand is like. If you’re in a student area with multiple universities, like Manchester or Birmingham, a 3 or 4-bed house could be a great HMO investment.

Research the renters in your area and determine what appeals to them. Families are likely to want larger properties, with a drive/garage, a garden in close proximity to schools. Students want to be central; near their University and local amenities, with good-size bedrooms and larger communal space.

How much rent should I charge?

You can calculate your monthly rent with a rental valuation. This takes into account current rents in your area, the condition and location of your property, and stand-out features your property has, such as gardens, garages and driveways. All these things are considered, along with the current rental market, to determine a realistic monthly rent.

As the landlord, the rent is ultimately up to you, but it’s good to know what you’re working with. Unsure what your property’s worth? Get a free rental valuation.

How do I calculate my rental yield?

Figuring out your rental yield is an important part of buy-to-let investment. There are two yields to consider: your gross yield and your net yield.

Gross rental yield

This is your yield without property expenses and is simple to calculate.

  1. Multiply your monthly rental income by 12 to get your annual income
  2. Divide that figure by the purchase price
  3. Multiply that figure by 100

This will give you your gross rental yield percentage. Here is an example of a buy-to-let purchased for £250,000 with a monthly rent of £1,750.

£1,750 x 12 = £21,000

£21,000 ÷ £250,000 = 0.084

0.084 x 100 = 8.4

Gross rental yield percentage: 8.4%

Net rental yield

Your net rental yield includes the expenses of owning a buy-to-let, making it a far more accurate representation of your investment.

This includes all property-related expenses, such as mortgage payments, insurance, maintenance, accountants and letting agents’ fees.

  1. Multiply the monthly rental income by 12 to get your annual income
  2. Subtract the annual costs of owning the property
  3. Divide that figure by the property’s purchase price
  4. Multiple that figure by 100

This will give you your net rental yield percentage. Here is the same example as above, a buy-to-let purchased for £250,000 with a monthly rent of £1,750.

£1,750 x 12 = £21,000

£21,000 – £6,000 (expenses) = £15,000

£15,000 ÷ £250,000 = 0.06

0.06 x 100 = 6%

Net rental yield percentage: 6%

A rental yield anywhere between 5% and 8% is considered a good investment. Anything below this may not provide you with a reasonable return.

Do I need a licence to rent out my property?

Some areas of the UK require landlords to have a licence. You can check with your local council to find out if you need a selective licence to let out your property.

If your property is an HMO, you may require an HMO licence. An HMO, or House of Multiple Occupation, is typically defined as a property let to two or more households, sharing bathroom and kitchen facilities, however, different councils have varying HMO rules and licensing requirements. Check with your local council to see what the HMO rules are in your area.

Do I need insurance to rent out my property?

Building Insurance is required for most buy-to-let mortgages. This covers the cost of rebuilding your home if it’s damaged or destroyed, minimising the financial risk for the lender.

Building and Contents Insurance, covers the building and everything in it. This will not cover the tenant’s belongings. They will have to get their own insurance for that.

Many landlords opt for rent protection or rent guarantee insurance, but it’s not a requirement for a buy-to-let mortgage. This essentially covers the monthly rent if the tenant is unable to pay – which has become even more popular with landlords since the pandemic.

Rent protection is included in our Essential and Complete plans, from £79 a month (inc VAT)

Do I need property management for my buy-to-let? 

Deciding if you need property management depends on your budget, free time, the level of service you’re looking for and the amount of control you want.

If you want little to no involvement in your rental, you’ll need a comprehensive level of property management. Some landlords want to do it themselves and be involved in the process – particularly with choosing tenants. If this is you, you’d be suited to a mixed level of support where you have control, but can contact an expert when you need it.

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