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How is buy to let different from owning my own home?

buy to let difference from owning my own home

If you are considering a buy to let property investment and wondering ‘How is buy to let different from owning my own home?’ Then here we explain more.

Essentially, a buy to let property is what it sounds like: you simply buy a property and then rent it out to a tenant.

If you don’t have the cash to buy a property for renting out, then you’ll need to access a buy to let mortgage or other types of finance. A buy to let mortgage is:

  • More difficult to access because of lending criteria
  • The mortgages tend to have a higher rate of interest.

When you own your home, you will live in it and not have tenants and the residential mortgage you have is easier to obtain and cheaper too.

However, you cannot obtain a residential mortgage and then rent out the property because this will be against the lender’s rules.

Tenants in your property investment

The other issue is that as a landlord, there are legal obligations to follow when you have tenants in your property investment which we explain later.

You will also need to take out specific landlord insurance such as:

  • Buildings insurance: Your buy to let mortgage lender will insist on buildings insurance
  • Landlord insurance is not required legally, but this is the insurance cover will help protect the investor’s property.

The other big difference between residential and buy to let properties is down to tax.

When you already own a home and buy another one, you’ll have to pay an extra 3% in Stamp Duty, there are different charges in Scotland and Wales to pay.

As a landlord you will be running a business

The big difference is that as a landlord you will effectively be running a business, and you’ll need to pay income tax on your rental income.

Whilst you could create a limited company to run your property investment, many landlords operate as sole traders and can deduct some costs from their rental income before paying tax.

From April 2020, the tax relief on a landlord’s finance costs has been restricted to the basic rate of the tax, which is 20% currently.

The government has also introduced other tax changes and removed the wear and tear allowance so for many landlords, running a buy to let property is no longer as lucrative as it once was.

However, lots of people still want to invest in bricks and mortar and see it as a sound long-term financial investment.

Differences between a buy to let mortgage and a resident residential mortgage

The other key differences between a buy to let mortgage and a resident residential mortgage may include:

Usually, a buy to let mortgage will be interest only, so when the mortgage term ends, the borrower will need to repay the original loan.

However, it’s important that a potential landlord does not rely on their ability to repay the mortgage to come from selling their property.

For example, should house prices fall, then you’ll be left to pay the difference between the mortgage and how much the property is sold for.

Investors need to appreciate that most buy to let mortgage lending is not currently regulated by the Financial Conduct Authority (FCA). There are some exceptions and these usually cover consumer buy to let mortgages.

How to borrow for a buy to let mortgage

Another difference is how much an investor can borrow for their buy to let mortgage.

Instead of basing the lending requirement on the borrower’s income, lenders will typically ask for the rental income to cover 125% of the mortgage payment.

And since property investment in the UK offers the potential for lucrative returns, you also need to consider:

  • That the property may be empty with no tenants paying rent
  • You will still have to cover the bills and council tax
  • You will also need to pay your buy to let mortgage

And you’ll need to pay for major maintenance and repair bills, for example, replacing a boiler.

Renting out your home instead of selling it

Another issue to consider about the difference between owning your own home and having a buy to let is when you decide to rent your home out instead of selling it.

This may be because the housing market is quiet or you may not achieve the asking price.

Also, you may decide to move into a partner’s home while retaining the original property and renting it out.

You can do this but if you have a residential mortgage, you need to inform your lender beforehand.

The term ‘accidental landlord’ is used generally to explain the circumstances of someone who owns their home, or who has inherited it, and decided to sell it out because they cannot or do not want to sell their property.

Owning your own home and having a buy to let investment

The bottom line about the difference of owning your own home and having a buy to let investment is that you are running a small business.

It’s also a business that gives the landlord important legal responsibilities. Most of these are aimed at ensuring that the tenant is safe in their home and include:

  • Gas appliances will need a Gas Safety certificate
  • Furniture must meet fire safety standards
  • Smoke alarms must be installed on each of the property’s floors
  • If there is a wood or coal burning stove, then a carbon monoxide detector is required
  • Electrical appliances will need to be tested as being safe
  • The water supply must work properly.

Landlords also require an Energy Performance Certificate and in England, they will need to carry out extra checks as to whether their tenant is an illegal immigrant and has a right to rent a property.

There’s also a legal obligation to protect a tenant’s deposit with a government-approved third-party and landlords must carry out repairs to the structure or exterior of their property when necessary.

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