Key to any decision to buy to let is the recognition that it is essentially a business venture. Like any other business undertaking, this in turn rests on two fundamental considerations: how much money is the business likely to generate (in the case, through rental income); and how much capital is going to be tied up in the business (the property or properties you will be buying to let to tenants).
Until fairly recently, the business case was made with considerable ease and with demonstrable success. Buy to let properties could be bought with readily available mortgages, rental income from tenants would not only meet the cost pf the mortgage repayments, but provide a surplus to set against building maintenance and management costs, and the property itself would represent a safe and solid capital investment, riding the wave of constantly rising house prices.
Recent increases in the cost of mortgage borrowing and an apparent end to continuously rising property values have caused worries for many smaller investors and especially those who were unprepared or ill-equipped to take a longer-term view of their investment. In cases, rental income could no longer cover mortgage costs and the fall in house prices, left the less successful landlords with properties they could not easily sell off.
Such experiences provide a timely reminder that buy to let should be viewed as a long-term investment business. They should not give the impression, however, that buying to let is no longer financially viable. Far from it. The demand for rental accommodation is already staging a vigorous revival and growth, as more and more prospective home buyers delay their decision to buy into an uncertain housing market and those who have already bought find that they can no longer afford the mortgage. Recent press reports have estimated that as many as one in seven (or 1.7 million) of all UK homeowners could become victims of negative equity during the coming year. For many of these, the only alternative will be private rentals.
So, there are certainly signs for growth in the rental market and the implications for the buy to let business plan are important. Unlike a standard mortgage application, for instance, an application for a buy to let mortgage will turn on the potential for rental income. Sometimes the decision whether or not to advance a buy to let mortgage will also take into account sources of other income (from regular employment, for example), but in other instances it might not. Current applicants, however, should not expect the search for a suitable buy to let mortgage to be easy or straight forward. The heydays of the past five or six years - 2006 saw a record £17.5 billion, or 10% of all mortgage lending, go to buy to let investors - have come to an end.
Although buy to let mortgages are still available, because of the mortgage lender's higher risk on this type of business-based mortgage, the interest rates will still today tend to be higher than those offered on properties for owner-occupation.
In line with current practices across the whole of the mortgage market, buy to let mortgage lenders will also be looking for a hefty deposit on the part of the investor - anything less than a minimum 25% deposit is unlikely to get such a scheme off the ground.