Buy-to-let mortgages have become increasingly popular in recent years and the market is believed to be worth around £10bn annually, according to the Council of Mortgage Lenders (CML). Some observers warn the market has reached its peak and that restrictive mortgages coupled with new legislation, such as the Houses in Multiple Occupation (HMO), are acting as deterrents to potential investors.

However, choice is of the essence. There were days when one could not purchase anything more extravagant at the supermarket than an orange. These days, one can get exotic fruit from kiwi to kumquats. Similarly, the mortgage market has responded to the needs of the market by providing choice and accessibility and the interest rate available on buy-to-let mortgages is generally not significantly higher than those on standard mortgages, which means there are still people willing to take the plunge into the buy-to-let market.

It is vital, however, that those embarking into this sector for the first time understand there are some crucial differences between buying a house to let out and buying one to live in. Unless potential investors really do their homework before leaping in, investing in buy-to-let property can be fraught with complications.

Brokers should be in a position to offer informed advice and respond to queries about buy-to-let mortgages and how they differ from standard mortgages. The following points, although not exhaustive, detail some of the key factors brokers and their clients should discuss when they are considering embarking on a buy-to-let investment.

Advice paramount

First, potential buy-to-let investors should be prompted to seek advice on local market demands from a registered or bonded letting agent who will be able to provide recommendations as to whether a property in a particular locality is going to be a good investment or not. They will also provide realistic guidelines on the potential rental incomes in each area.

If appropriate, clients should be encouraged to consider using a letting agent. An agent will help to identify suitable tenants, manage the tenancy and ensure that brokers’ clients comply with all the legal and regulatory requirements of being landlords. This is crucial unless clients are prepared to spend a considerable amount of time personally managing the properties. Letting agents will not only make sure that the correct forms are completed, they will also take on the day-to-day management responsibilities of being a landlord. Of course, there is a price to pay, but an expert could help to increase client returns on their investment and reduce the likelihood of any tenant related disasters.

Buy to let should by no means be seen as a ‘get rich quick’ scheme. It should be made clear to clients from the outset that this is a medium to long-term investment. There is no guarantee that the property will be let out on a back-to-back basis and the market in the area may be subject to change. When calculating the potential return on investment, it is vital that clients take into account the likelihood and possible duration of ‘void’ periods, that is, the time a property is empty between lets. The client must be sure they can weather the storm financially if they fail to let out the property for any length of time. Costs associated with future maintenance and repair must also be considered. Rented properties are much more likely to be leasehold, so estimating the likely future repair or contribution towards bills is an important factor in the long-term budget. For example, a landlord who rents out the flat he owns within a block is classed as a tenant of the building and may have communal financial responsibilities. Although some of the financial responsibilities can be passed on to the actual tenant, this is not the case for all costs. If substantial future expenses were to arise, such as the repair of the communal roof, the client would not be able to recover this expense from the tenants.

In short, clients must be encouraged to do their sums before going into a buy-to-let investment. Taking into account whether the rent will cover mortgage payments, maintenance and other costs such as ‘void’ periods and letting agents’ fees will give them a much more realistic view on whether buy to let is really a viable option for their circumstances.

Rules and regulations

Brokers should endeavour to find out more about the legal and tax implications of entering the buy-to-let market. The whole relationship of landlord and tenant is governed by complex statutory provisions and many different Acts of Parliament. If clients do not have a good understanding of the law, this could be a potential minefield, so clients should always be advised to obtain expert legal assistance. Brokers should also recommend their clients seek appropriate professional advice on their tax position before entering into any contractual agreement.

Investment property is subject to Capital Gains Tax and rental income is subject to Income Tax but many people who have never owned investment property before do not understand the implications of tax on properties. An accountant will be able to advise on the ins and outs of the tax issues, including what items will be chargeable against income received. Paying for this advice at an early stage can save considerable money in the long term.

The legal contract with the tenant is determined by the assured shorthold tenancy (AST) agreement. This allows the landlord to recover possession of the property at the end of the fixed term or after the first six months, if the contract is short term and the landlord has served the correct notices on the tenant. It is illegal to evict a residential tenant without a court order. A possession order can be obtained within two months of the end of an AST where the tenant has not vacated the premises as agreed in the contract, and where they have been served the correct form of notice. The tenant’s obligations include paying for repairs that are due to their own fault and for outgoings such as utilities, when the property is let out as a whole and not to individual tenants. They must also use the property for solely residential purposes and must provide access to the landlord to inspect and repair the property from time to time.

Generally speaking, the landlord is responsible for repairs to the exterior of the house and safety issues. Brokers must discuss the obligations that landlords have to any clients, so they understand the full implications of taking on the role. For example the landlord has obligations to repair the property, to have gas installations inspected annually by a Corgi registered engineer and to ensure that all furniture and fittings are fire-safety compliant. Non-compliance with safety regulations is a criminal offence carrying monetary penalties, imprisonment or, in the event of death due to negligence, it is possible for a landlord to face a manslaughter charge. Where a letting agent is used, they are also liable under the regulations to ensure that the gas safety record is kept up to date. Electrical equipment and other items in the property must also be safe. In compliance with the covenant of ‘quiet enjoyment’, which stipulates that the tenant may occupy the property without interference, the landlord must not enter the property without the tenant’s consent, except in case of an emergency. Other contracts entered into by the landlord are with the lender, the insurer and, if applicable, the letting agent.

For those clients who already have a mortgage or are planning to rent out a leasehold property, it is important to check whether permission has to be obtained from the lender or the leasehold landlord before letting out the property. If consent is not obtained, these parties would be able to take possessions proceedings against the landlord. If a client has arranged a mortgage with a new lender, they must obtain the consent of the new lender to let the property. It is likely that the lender will require the property to be let at the ‘open market’ rent and on an assured shorthold tenancy basis. The lender may also require copies of all relevant tenancy agreements and associated papers. The conditions of buy-to-let mortgages are not the same as the standard conditions on a residential purchase, therefore, client’s must be made aware of the conditions of their mortgage so they comply in full with the terms and conditions, particularly those relating to buy-to-let arrangements.

Brokers should talk to their clients about insurance and if they do not believe they are qualified to do so, make suggestions for their client to speak to someone who is. The main insurances required when investing in a buy-to-let property are buildings insurance to protect against fire, vandalism, water or weather damage; contents insurance; rental guarantee to insure against tenants defaulting on rent; and emergency assistance, covering the cost of repairs that have to be carried out including call-out charges. The landlord has an obligation to insure the property and its contents, although tenants are responsible for insuring their own personal possessions.

Setting out on the buy-to-let market can be both exciting and daunting. It is still seen by many as a risky investment, but one that can still reap considerable financial rewards, if thoroughly researched. By getting some of these issues out in the open at the outset, brokers will be able to help clients reach an informed decision on their buy-to-let investment. key points Buy-to-let advice should be followed with recommendations on estate planning and Inheritance Tax

According to the CML, there are now 767,000 outstanding residential buy-to-let mortgages worth £83.9bn.

Assured shorthold tenancy agreements should be discussed with someone from the legal profession.