At AFP, we cannot advise whether letting property is a good investment decision for you but we feel that it is important to point out the risks associated with “Buy to Let Mortgages” & “Let & Buy” mortgages which we see as follows:
1. Interest rates may rise & the rent may not be enough to cover the mortgage payments.
2. The property may remain un-let for periods of time.
3. The tenants may not pay their rent & may have to be evicted, which requires County Court proceedings after due notice. This can take time during which you still need to make mortgage payments.
4. In addition to normal “wear & tear” and maintenance, the property may suffer damage through the actions of the tenants.
IN A “LET & BUY” MORTGAGE SITUATION:
5. The existing lender may increase the interest rate payable to reflect a higher lending risk.
6. Rental income is unlikely to count towards affordability for a new mortgage, although the existing mortgage liability may well count as an outgoing, reducing your borrowing capacity accordingly.
Having made the decision to let property, you may therefore like to consider the following precautions.
Make sure you have a formal short term tenancy agreement in place, drawn up by a solicitor.
Employ a managing agent who is remunerated monthly from the rent received. Ensure the agent has a properly constituted client account. Avoid agents who will simply find tenants in return for a fee with no ongoing responsibility.
Ensure a sufficient deposit is paid (normally up to 3 months rent). This will provide a cushion in the event of the non payment of rent or damage to the property.
Take urgent action if rent is unpaid & consider adding legal expenses insurance to the property insurance.
If property prices are falling consider switching any interest only loans to a capital & interest basis to help maintain your equity.
Contact your Inspector of Taxes to clarify your tax position with regard to rental income received & capital gains made.
And, in “Let & Buy” Mortgage cases;
Make sure you have obtained your existing mortgage lender’s permission to let the property.
Make sure you have informed your existing insurer that the property is let and that the cover is amended accordingly.
If you are an experienced property investor you may already be aware of the risks and the steps you can take to help minimise them. However we hope you will also appreciate this reminder.