Buy-to-let mortgages explained for 2021

Despite the uncertainties of 2020, the buy-to-let mortgage market continued to grow through the latter part of the year. The outlook for the early part of 2021 looks robust with lending support to continue until the end of March.

Stock markets remain volatile and interest rates low. That means that property purchases in such conditions can be a shrewd decision compared to other investment options.

There has been some contraction in the availability of buy-to-let mortgage products, particularly in the early days of the COVID-19 pandemic. But markets are rebounding and demand for buy-to-let products remains high as it does for prospective tenants wishing to rent a house. Those with a reasonable deposit to put down can still benefit from some great deals too.

So what exactly is buy-to-let, what should investors consider and will purchasing for the rental market still be a good option in the post-lockdown environment which emerges as the new year progresses?

Buy-to-let meaning

Buy-to-let mortgages are for landlords who want to buy a property in order to rent it out to tenants in return for rental payments. In order to make a profit, rental payments need to be higher than the cost of maintaining the property, plus any letting agent fees and your own monthly mortgage repayments. There may also be other regular costs associated with being a landlord which need to be factored in.

Is it worth investing in a buy-to-let during 2021?

The acquisition of bricks and mortar has long been considered a prudent and trusted form of investment. US president Franklin D. Roosevelt famously said “real estate cannot be lost or stolen, nor can it be carried away” before concluding, “it is about the safest investment in the world”.

There are two key indicators to consider as to whether a buy-to-let investment will be one that provides investors with a good return:

  • Rental yield - indicates the value of a property as a return on investment from the rent received
  • Capital growth - the amount a property’s value increases over time.

Buying to let can provide tangible returns from rental yields and the potential for long-term capital growth.

Like all investments, there are risks that come with buy-to-let. Principally, these include the potential for a rise in interest rates making borrowing more expensive, the problems associated with difficult tenants or market trends which might make it harder to sell the property in the future.

But right now, the buy-to-let market is playing a key role in the property sector bounce back since the doldrums of spring 2020. Many investors have expanded their portfolio during the pandemic and associated lockdowns, in particular making the most of the stamp duty cut which is set to continue until the end of Q1 2021.

Demand for rental properties is also likely to remain buoyant with job insecurity and downsizing. There will also be a continued rise in staycations resulting in demand for holiday lets.

And of course students will eventually return university campuses in 2021 once COVID restrictions are lifted, with most of them needing rental accommodation.

As rental demand rises, so too does the potential for rental yields. An increase in the number of people wishing to rent properties also leads to lower levels of voids (periods where a landlord has no tenant paying rent) which reduces the risks associated with buy-to-let.

What deposit is needed to start buying to let?

The minimum deposit for a buy-to-let mortgage is usually 25% of the property’s value (Loan to Value). However, products are available which require a lower deposit.

A deposit of around 20% should still give you access to some good deals. A 15% deposit will restrict the number of lenders who would approve a buy-to-let mortgage but not omit you from the market and you might still find products available at a 10% LTV.

Lenders who offer particularly low deposit buy to let mortgages will have other criteria to meet. This is because they set boundaries around lending to mitigate the additional risk involved with high buy to let LTVs.

The key is to seek out expert advice before committing to any mortgage product.

How to start with buy-to-let property investment

If you’re not buying a property outright, or plan to live in the property, then you will need to apply for a specific buy-to-let mortgage.

How your eligibility and affordability will be calculated differs to a residential mortgage. Lenders will primarily consider the potential rental income from the property but also take into account other factors including personal income.

Those with four or more properties which are rented out are considered to be “portfolio landlords”. The Bank of England introduced new rules for such landlords in 2017 with more robust rules for such investors to access additional finance. Some lenders will apply additional rules such as limiting the amount of properties a landlord can have to 10.

It is also possible for first time buyers to access buy-to-let mortgages though it isn’t always easy to do so. First time buyers may require a larger deposit than others and be offered less choice in the products available.

Lenders will often require that your anticipated rental income will be at a minimum of 125% of the monthly interest payments on the mortgage. However, regulations actually recommend that this be 145%. This ratio is known as “rental cover”.

The first step in starting out with a buy-to-let is to identify the right property. You should be aware that lenders will often impose restrictions on certain types of housing. For example, for student lets and Houses of Multiple Occupancy (HMOs).

Typical factors that lenders will take into account during their property search are location, the type and demographic of tenant likely to be attracted to certain properties and proximity of the property to their own home.

You then need to decide what levels of rental yield and / or capital growth you want, and need, to achieve. Generally, a rental yield of 5% is considered to be reasonable but a higher yield can often be achieved.

We recommend aiming to balance both rental yield and expected capital growth. Most buy-to-let landlords will ultimately make their returns from a balance of both, rather than just exceptional rental yields or profits from the sale of properties in the future.

A good way to assess yields in the areas in which you are considering investing is to use look at local property data tool. Using our Local Data tool you can draw a custom area to assess prices, rents, yields and much more.

The majority of buy-to-let mortgages are interest only. While this can be a great way to reduce monthly costs, you will need a plan to also pay off the capital to ensure the mortgage is fully paid off within its agreed term.

Be aware of additional costs above the purchase price of the property. These will include:

  • Lawyer and mortgage lender fees
  • Stamp duty for purchases above £500,000 (a temporary limit until March 2021 – always check our stamp duty calculator)
  • Refurbishment, decorating, upgrading and modernisation costs (particularly if buying an unmodernised property)
  • The costs associated with gas safety inspections and the preparation of an Energy Performance Certificate (EPC)

You will also need to secure landlord, building and contents insurance. You should also consider whether you wish for an agent to manage the property and factor in professional property management costs.

Any rent you receive from tenants is considered to be income. This means you will be obliged to pay tax on it. The amount of tax you pay depends on which tax band you fall into. You will also be required to pay capital gains tax on any property you sell to make a profit.

Next steps in considering a buy-to-let investment

The above guide tells you everything you need to know to start thinking about becoming a buy-to-let landlord. As with all investment decisions, sound independent advice is essential before deciding on your next step. PropertyData offer powerful tools for research, sourcing properties and appraising the decision to move forward with an investment based on the latest data available.

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Transparent data promise

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How often is the data updated?

The data is updated in near real-time.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from the portal, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

What are the statistics used?

Averages shown are the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How do you know the square footage of properties?

We use proprietary technology to read the square footage of properties from agent floorplans. Although we cannot determine the square footage for all properties, we can usually get sufficient coverage. Agents are sometimes known to inflate square footage, and this should be borne in mind as a weakness of this data.

How often is the data updated?

The data is updated in near real-time.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from the portal, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property "price paid" data provided by the Land Registry.

How often is the data updated?

Once per month when released by the Land Registry, typically towards the end of each calendar month covering up to the end of the previous calendar month.

What time period does the data cover?

You can customise the time period using the filter at the top of the view. The default time period is up to 9 months back from today's date. The latest data covers the period up to 2022-03-31, although some sales that took place before this date may still be added in the coming months.

How is the raw data processed?

No additional processes are applied to this data.

What are the statistics used?

Averages shown are the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property "price paid" data provided by the Land Registry, and Energy Performance Certificate (EPC) data provided by Ministry of Housing, Communities & Local Government.

How do you know the square footage of properties?

We match the Land Registry data to EPC data provided by the MCHLG. Due to the fact that not all properties sold have had an EPC and vagaries of addressing in the UK, we are not able to determine the square footage of all properties, but we can usually get sufficient coverage.

How often is the data updated?

The private paid data is updated once per month when released by the Land Registry, typically towards the end of each calendar month covering up to the end of the previous calendar month. The energy performance certificate database is updated monthly.

What time period does the data cover?

You can customise the time period using the filter at the top of the view. The default time period is up to 9 months back from today's date. The latest data covers the period up to 2022-03-31, although some sales that took place before this date may still be added in the coming months.

How is the raw data processed?

No additional processes are applied to this data.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How often is the data updated?

The data is updated in near real-time.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from the portal, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Room let listings on SpareRoom, the UK's biggest room letting website.

How often is the data updated?

The data is updated in near real-time.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from SpareRoom, they are soon removed from this tab.

How is the raw data processed?

Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How often is the data updated?

The data is updated in near real-time.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from the portal, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded. Yields are calculated by comparing only properties with the same number of bedrooms, e.g. 3-bedroom properties for rent with 3-bedroom properties for sale.

What is the yield calculation used?

The calculation used is (average_weekly_asking_rent * 52 / average_asking_price), expressed as a percentage. It is a top-line gross yield, meaning no expenses are considered.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How often is the data updated?

The data is updated in near real-time.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from Zoopla, Rightmove or Spareroom, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Yields are calculated by comparing only properties with the same number of bedrooms, e.g. 3-bedroom properties for rent with 3-bedroom properties for sale. For the SpareRoom data, hypothetical properties consisting of two to six average double rooms with shared bathrooms are used to derived average rent. For all sources, listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

What is the yield calculation used?

The calculation used is (average_weekly_asking_rent * 52 / average_asking_price), expressed as a percentage. It is a top-line gross yield, meaning no expenses are considered.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property "price paid" data provided by the Land Registry.

How often is the data updated?

Once per month when released by the Land Registry, typically towards the end of each calendar month covering up to the end of the previous calendar month.

Zoopla Zed-index

What time period does the data cover?

The data covers transactions in the last six years

How is the raw data processed?

No additional processes are applied to this data.

What are the statistics used?

The average shown is the interquartile mean, a type of average that is insensitive to outliers while being its own distinct parameter. The 80% range means that 80% of the listed properties fall inside this range.

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How often is the data updated?

The listings data is updated in near real-time. The Land Registry data is updated once per month when released, typically towards the end of each calendar month covering up to the end of the previous calendar month.

What time period does the data cover?

The price paid data shown goes back to January 2015. The listings data is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from the portal, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

What are the calculations used?

Average sales per month are for the last 3 finalised months. Turnover is average sales per month divided by total for sale. Inventory is 100 divided by turnover.

Where does the raw data come from?

Property listings seen on rightmove.co.uk, zoopla.co.uk and onthemarket.com.

How often is the data updated?

The listings data is updated in near real-time. The Land Registry data is updated once per month when released, typically towards the end of each calendar month covering up to the end of the previous calendar month.

What time period does the data cover?

This is a real-time market snapshot - the data covers currently listed properties. Once properties are removed from the portal, they are soon removed from this tab.

How is the raw data processed?

Duplicates from multiple sources are matched and reconciled as far as possible. Listings with obvious errors, where price or number or bedrooms appear out of range, are discarded.

Where does the raw data come from?

We receive data on the extent and corporate ownership of all land titles in England & Wales from the Land Registry.

How often is the data updated?

The data is updated once per month when released, typically in the first few days of each calendar month.

What time period does the data cover?

This is an ownership snapshot - the data represents ownership as recorded by the Land Registry at the last monthly export.

How is the raw data processed?

No additional processes are applied to this data.

Where does the raw data come from?

We source different expert forecasts Savills, Knight Frank, OBR

How often is the data updated?

The data is updated annually when new forecasts are released, typically towards the beginning of the year.

How is the raw data processed?

We calculate a consensus forecast using a simple mean average.