What will a buy to let mortgage cost?
Mortgage rates are not the same as in the residential market - lenders consider buy to let a greater risk and demand a greater return, so their buy to let rates can be up to one percentage point higher than residential rates. The deposit required for buy to let mortgages is also higher. Most lenders ask for at least 20% of the value of the property, and this can rise to 50% on properties valued at £1 million or over. If you arrange your buy to let mortgage through a broker you may have to pay up to 1.5% of your mortgage value in broker fees.
You will also have to pay for the survey and legal fees, as with any property purchase.
There may also be service charges to consider in a leasehold property. If you plan to let furnished, you will have to allow for the cost of buying reasonable quality basics - strict fire regulations prevent you using cheap second-hand furniture.
If you plan to use a letting agent, you will have to factor in that cost as well - fees can be between 15 and 20% of the rent.
Don't forget to add on the cost of insurance - not just for buildings and contents, but also against loss of rental income if the property stands empty, possible damage by tenants or for legal fees if you need to evict a tenant.
Any rise in the value of a rental property, unlike your home, is liable for capital gains tax. Each individual is allowed £9,200 income tax-free per annum (you should check these allowances at HM Revenue and Customs as they change each year, these figures are correct for 2007-08).. This constitutes your total Capital Gains Tax allowance for the tax year and assumes that you have not used up the allowance on other capital gains.
However, you will be able to set some of the maintenance and running costs off against tax. Mortgage interest payments of buy to let properties, for example, can be set against rental income.
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Your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured on it.
