With the addition of our Buy To Let Quarter, Richard has provided a short, jargon-busting blog to break down the key Buy to Let terms. Buy to lets are often perceived to be quite a daunting area of the housing market. However, with the right guidance, they can also be a fantastic place to make your money work harder.
Buy To Let Terms Explained…
Buy to Let or BTL:
Whilst most often used as a term for buying a house for the purpose of letting it to the general public, it is also a term used for the market in general. Buying a property to rent out can be a great way of increasing your income, however, with the changes to the tax system and running costs of the home and potential void periods when the property has no tenants, there are a lot of factors to consider when looking at whether a property is a good buy or not. Typically let to an individual, couple or family on an AST…
What’s an AST?
AST stands for Assured Shorthold Tenancy. This is typically a 6-month agreement to named individuals stating the term of the period that they will rent the property for, the agreed rental amount and what happens after this period.
Let to Buy or LTB:
Let to Buy, surely this is the same as a buy to let, right? Not quite! This is when you get a mortgage on your current residential property in order to release equity to buy a new residential property for you and rent out your current home. This is a great start to your first buy to let, so long as there is enough equity in your current home, you could release some for the deposit on your new home and keep your existing property to generate income. Your mortgage payments on your new home will be higher so it’s important to check that the extra income is enough to make it worth your while!
House of Multiple Occupancy or HMOs:
House of Multiple Occupancy or HMO. Also known as rent a room. One property with several bedrooms that (typically students or professionals) will rent on a room by room basis. Shared kitchens and bathrooms within these houses are common although some rooms may have a higher rent if they have their own private bathroom or en-suite. Typically this will have a far higher income than a traditional Buy To Let but with more income comes more hassle!
Especially locally, councils are making HMO’s more difficult by limiting the areas that a new HMO can be set up and properties requiring licences to run based on the area and the number of people living there. Most lenders will want to see a track record and experience of being a landlord, as managing multiple tenants is more trying than 1!
Multi Unit Block or MUB:
Multi Unit Block or MUB. Slightly more complex, but MUB’s are typically converted buildings with multiple flats within one block but all on one land registry title. Most flats will have their own titles at land registry however buying and MUB means owning the entire property as one single entity. As above an MUB can be very profitable as they are generally cheaper to purchase, however this is due to the smaller number of funding options available so it’s important to research the costs of this before jumping in!
Special Purpose Vehicle or SPV:
A SPV is a Limited Company set up for the sole purpose of owning Buy to Let properties. As mentioned above, the tax changes have seen a surge in Limited Company Buy To Let, as with everything, there is a balance to be struck, the increased costs against the benefits. Always discuss the options your friendly neighbourhood accountant first.
First Time Buyer, First Time Landlord:
First Time Buyer (FTB), First Time Landlord (FTL) – A term for people who have never owned a property before and rather than buying a residential property for them to live in as their first home, they choose to buy a Buy To Let instead. Happy living with mum and dad while rent is cheap but don’t want to miss out on the property market. This option gives you the answer you are looking for.
There are limited options available within the mortgage market currently but it can still be a great option with the right help. They are also used for people who work abroad for large sections of the year such as yacht/cruise staff or oil rig workers as well as people with housing provided by their employer, such as the armed forces.
Interest Coverage Ratio or ICR:
ICR is the calculation a lender will do to determine whether or not the rental income is sufficient to cover the mortgage repayments. Different mortgage lenders assess and stress this at varying levels and are always more than 1:1. This is to ensure that changes in the market and interest rates are less likely to affect your ability to pay the mortgage.
Loan to Value or LTV:
LTV is the amount of the loan against the value of the property. Buy To Let typically require a 25% deposit, much bigger than a residential home. Whilst options do exist with a smaller deposit this is usually offset by the increased costs.
There we have it, buy to let terms explained! Regardless of this, the world of Buy To Lets is a minefield and far more complex than most people realise when thinking about becoming a landlord.
It is crucial the ensure you get the right help in all areas: Mortgage Advisers to help you get the best deal for your circumstances, Estate Agents to make sure you get the best property at the best price AND that is can be rented for the right price as well and accountant to make sure the money works as well as it can do for you.
The Mortgage Quarter has recently launched The Buy To Let Quarter so if it is something you have been considering there has never been a better time to reach out and get the support you need.
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