Buy-to-let: How to do your sums

Chris Torney / 18 January 2017

Thinking about investing in a buy-to-let property? Do your sums first.

If you’re thinking about investing some of your money in buy-to-let, it is important to do your sums in advance to see how much cash you will need to spend upfront and what sort of returns you are likely to make.

Buying a property

Unless you have enough money in a pension or other forms of saving to buy a house or flat outright, you will need to take out a buy-to-let mortgage. 

The rate of interest you’ll be charged will depend to a large extent on how much deposit you can put down – and normally this will be at least 25% of the property’s value. 

So if you’re looking at a home on the market for £200,000, that means a deposit of at least £50,000.

The size of your monthly repayments will depend on the interest rate and the length of your loan: there are numerous online calculators which will show how much you will have to repay based on these factors.

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Extra purchase costs

Your deposit isn’t the only upfront cost you’ll face and the bad news is that stamp duty rates for landlords have been increased significantly this year. Since April 2016, buyers of second homes have faced a 3% stamp duty surcharge, so they must now pay 3% of the purchase price as an extra tax in addition to the standard duty rate.

On a £200,000 house or flat, this means the tax for buy-to-let investors is now £7,500 rather than the £1,500 charged to owner-occupiers.

On top of this, you will need to cover solicitors’ fees, surveys, as well as any extra charges related to your mortgage. 

Your expenditure will increase if you use a letting agent to find and vet tenants, and perhaps also to manage the property.

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Rental income

In general, your lender will require your rental income to exceed your monthly mortgage repayments by a quarter or a half. You will be able to get a good idea how much rent you can charge from looking at rates on similar properties in the area – but be aware that rental rates can fall as well as rise over time.

You may be able to get enough rent not only to cover mortgage repayments but also to generate a regular income for yourself, particularly if you can put down a large deposit.

Under current rules, the cost of the mortgage interest you pay can be offset against taxable earnings for income tax purposes. 

But over the next four years, the amount of income tax relief is being reduced from its current 40% - for higher-rate taxpayers - to 20%. If you are not a higher-rate taxpayer, however, you will not lose out from this change.

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Unexpected costs

Being a landlord comes with numerous responsibilities: it will be up to you to keep your property in good repair and to deal with problems such as flooding or a broken-down boiler. 

Consider taking out landlord insurance so you are not hit with large bills out of the blue.

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Capital gains

Landlords hope that rising property prices will help them generate significant capital growth. This has certainly been the case in the last couple of decades, but there is no guarantee that house prices will always increase.

Bear in mind also that any profit you make when you eventually sell will be subject to capital-gains tax.

Next article: Five buy-to-let pitfalls to avoid >>>

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.