Rents are rising in London due to a shortage of available properties. That’s partly due to landlords selling up after being squeezed by successive tax rises, but is also down to an increase in demand as tenants return to the capital’s centre as pandemic restrictions ease.

In the wider UK market, rental properties continue to be the source of strong demand, with rents climbing 1.3% in the 12 months to September 2021, according to official figures. So, is now a good time to become a landlord? And if so, what do you need to know from a financing perspective?

Why become a landlord?

For most people, the biggest reason is ensuring a steady retirement income. With pension pots being squeezed and more people retiring in the UK over the next few decades, having additional income means you are not dependent on annuity from pension funds or the state.

I’ve decided to take the plunge, what are the first things I need to consider?

The most important starting point is to speak to a tax accountant to understand the tax implications. Any rent you earn will be additional income, so depending on what you’re already earning, this could put you into a higher tax bracket.

There are potential tax benefits to purchasing a house via a limited company, rather than as an individual – but it’s critical to assess what would work best for your situation with a tax adviser, before starting out.

Yearly tax returns will also need to be completed, so keep a record of any income and expenditure to do with the property, such as gas checks or repairs.

Is there anything I need to consider when looking for a buy-to-let mortgage?

From a mortgage/cost perspective, there are few things you need to consider. Firstly, you tend to get better terms on buy-to-let (BTL) mortgages as an individual, rather than a business or limited company. However, since last year it is no longer possible to deduct your mortgage from rental income to reduce your individual tax bill, so again, get professional tax advice on your situation.

Deposit is also important. Generally, you’ll need a minimum of 25% but there are lenders who would consider 20% – mortgage rates will probably be higher at this lower level however.

Additionally, unlike a residential mortgage where the lender would consider your income to stress test whether you can afford the property, for BTL mortgages the decision is based on the projected rental income. Lenders have different stress test calculations but roughly, if you’re looking to borrow around £150,000, you would need to secure £900 rental income per month.

It’s also important to note that what you pay for a property doesn’t dictate its rental income, so it is worth talking to a lettings agent to find out average rents in your area and therefore the likely return.

Should I be fixing my mortgage terms?

Depending on your reason for getting a mortgage, fixing your terms for longer is better – typically five years is beneficial, particularly with the Bank of England’s base rate likely to rise in the near-term.

Are there any other fees or costs I should be aware of?

Yes, some apartments (those on a leasehold) are subject to service fees/ground rents, which must be covered by the landlord.

Buy-to-let buyers in England and Wales will also have to pay an additional 3% on each stamp duty band. In Scotland it’s 4% on anything above £40,000.

England and Wales stamp duty tax bands

If you are looking to purchase a property to let and would like to know more about your mortgage options get in touch with one of our expert brokers at Knight Frank Finance.