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Getting Started Guide
Getting started with a Buy to Let mortgage.
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Applying for an Agreement in Principle and finding the right property
You’ll find it helpful to have an Agreement in Principle (AIP).
If approved you’ll be given an indication of how much you could borrow. Most estate agents need to see this to show that you’re a serious buyer. There’s no charge for this, and no obligation to apply for your mortgage with us. You’ll need an appointment with one of our Mortgage and Protection Advisers to apply for your Agreement in Principle. You can choose to have your appointment in branch or over the phone.
What you’ll need for your appointment
- Details of the property or type of property you are interested in buying
- Your assessment of the rental income the property should be able to generate. This should be supported by examples of rents for similar properties in the area
- Details of your income.
What should I consider when choosing which property to buy?
Tenants - think carefully about the type of tenant you want to attract e.g. young professionals, families or sharers. Considering this may help you to decide on the type of property you purchase and its location.
The property should be let on a single assured shorthold tenancy (in England and Wales), a short assured tenancy (in Scotland) or a private tenancy (in Northern Ireland). A maximum tenancy of 3 years is acceptable when the tenancy is in the form of a Department for Communities and Local Government (DCLG) model agreement of September 2014 (or as amended) or the Scottish equivalent or such other replacement tenancies as may be prescribed by legislation from time to time.
Location - do your research and visit lots of different areas. Location is an important consideration and will often determine the type of tenant you will let to. Don’t necessarily buy locally to your home. Think about prosperous towns which might attract a higher demand for rental property. Once you've chosen an area consider the locality, think about transport links, parking, shops, schools and other local facilities - pick the brains of letting agents for information about areas where properties may be easier to rent.
Condition of the property - if you're buying a property which needs improvements, restrictions could be placed on the amount you can borrow and it could also delay how quickly you can let the property out. Can you afford the mortgage payments during the renovation period?
Rental income - do your homework, talk to local letting agents, check the local press to find out comparable rental values. The mortgage valuation will include an estimate of the rental income of the property on an unfurnished basis. But remember, there are no guarantees of what rental income you will get or if the property will rise in value over time.
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Had an offer accepted? You're ready to start your mortgage application
You can start your full application over the phone or in branch - you'll need the following:
- Address details for the last 3 years
- Employment and income details for the last 18 months
- Any outstanding financial commitments
- Evidence of possible rental income (eg. monthly rental charge on similar properties)
- Last 3 months bank statements
- Proof of bonus / commission
- Your last P60
- Proof of ID – passport / utility bill
- SA302 tax return forms if you are self employed.
To speak to a Mortgage and Protection Adviser you’ll need to get in contact with us.
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The legal side of buying and selling a property can be carried out by either a solicitor or licensed conveyancer. For simplicity, we will refer to both of these as conveyancer.
They’ll check who owns the property you want to buy, what’s included in the sale, and whether there are any clauses in the property’s deeds you or your lender need to be aware of. In Scotland your solicitor will also put in your offer and negotiate for you.
Important steps:
- Get an estimate from your conveyancer of all costs, including any legal fees and taxes
- Ask them to explain anything in your mortgage offer you don’t understand
- Ask your conveyancer to confirm any Stamp Duty Land Tax/Land and Buildings Transaction Tax (properties in Scotland) charge payable
- Tell them if you’ve negotiated for any items such as curtains, carpets or kitchen appliances to be included in the sale
- Make sure you read any documents your conveyancer sends you very carefully.
You can use the Lloyds Bank Conveyancing Service to compare quotes from our panel of up to 200 conveyancing professionals. You can review the quotes and choose a conveyancer based on what matters to you - the price, the firm's location or their service rating.
Get a quote for your legal costs
Alternatively, you can appoint your own conveyancer, or your mortgage adviser can help arrange one during your mortgage appointment using the Lloyds Bank Conveyancing Service.
All conveyancers instructed through the Lloyds Conveyancing Service offer a 'no completion, no legal fee' guarantee, so you'll have nothing to pay for the legal work done if the purchase falls through. No legal fee is payable, however if the conveyancer has made payments to third parties on your behalf, such as fees for searches, these will still be payable.
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Your obligations as a landlord
Tenancy agreements
A tenancy agreement is a contract between the landlord and tenant. It is most likely to be an Assured Shorthold Tenancy agreement (AST), which is regulated by the Housing Act 1988, and provides limited security of tenure to the tenant. Although the content of tenancy agreements varies, they should contain the following clauses:
- Details of the parties involved
- The date that the tenancy began
- The duration of the tenancy
- Details of the initial deposit that the tenant should pay and how it is to be protected
- Details of the monthly rent, when it is due and how it is to be paid
- The length of notice that the tenant and landlord need to give to end the tenancy
- Details of the tenant's obligations while renting the property
- A provision confirming that the tenant is not liable for fair wear and tear to the property
The tenancy agreement should be signed by the tenant and the letting agent, or the landlord if no agent is involved. It can subsequently be changed if both parties agree. We recommend you seek advice from a letting agent or independent legal advice on the terms of the proposed tenancy agreement.
Tenancy Deposits
Initial deposits cover you against missing items or any damage caused by the tenant.
Deposit Protection Schemes
Tenancy Deposit Protection (TDP) schemes guarantee that tenants will get their deposit back at the end of the tenancy. However they must meet the terms of the tenancy agreement and must not damage the property.
Landlords must protect their tenants' deposits if they have let the property on an assured short-hold tenancy which started after 6 April 2007. However it’s good practice for landlords to protect deposits in all circumstances. TDP schemes do not cover holding deposits.
Landlords who don’t protect their tenants' deposits when required to can be taken to court by the tenant. They may need to repay the deposit plus a sum equivalent to three times the deposit. The landlord may also be unable to seek possession of their property.
Approved Schemes
There are three TDP schemes approved by the UK Government:
Types of Scheme
There are two types of TDP scheme:
- Custodial - the DPS provides the only custodial scheme. It holds the deposit in a bank account and returns it at the end of the tenancy to the person who is entitled to it. This scheme is free to landlords and letting agents.
- Insurance based - where the landlord or landlord's agent holds the tenant's deposit and pays a fee to insure it against landlord default. My Deposits and TDS are insurance based providers.
Landlord repair and maintenance obligations
The Landlord and Tenant Act 1985 covers the three main areas of responsibility which landlords have under an Assured Short-hold Tenancy (AST).
Repair
Landlords must keep the structure and exterior of the property in a good state of repair. You are responsible for ensuring that the property is safe, fit for use and in a fair condition.
Gas and Electrical Safety
Landlords are responsible for the safety of gas installations and appliances. You will need to have an annual safety check and keep proper records of the checks. There are also regulations covering the safety of electrical installations and appliances. Though not currently compulsory in all properties, it makes good sense to fit carbon monoxide and smoke detectors in all let properties. Landlords must ensure they are aware of any changes to relevant legislation.
Fire Safety of Furnishings
You must be able to verify that any soft furnishings and fittings you provide adhere to the relevant standards. Make sure you seek independent advice on your responsibilities.
Ending a tenancy
At the end of an Assured Short-hold Tenancy (AST) as a landlord you have an automatic right to possession of the property, as long as you have given the tenant two months’ notice to vacate the property.
If the notice period expires and the tenant has still not left the property, you will need to start the process of eviction through the courts. You must not forcibly remove the tenant without an eviction order.
Landlords seeking possession under an AST because the tenant has not paid the rent, or broken other terms of the agreement, will need to use one of the reasons or 'grounds' for possession specified in the Housing Act 1988.
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Getting your property ready to rent
Choosing an agent - If you decide to use a letting agent, make sure they are a qualified member of one of the trade’s professional bodies – the Association of Residential Letting Agents, the National Landlords Association or the National Association for Estate Agents. All of these bodies have Codes of Practice which set the standard of service the agent should provide.
Completing an inventory - The agent will carry out a full inventory of the property before it is let, they may charge for this. The condition of the property and its contents will all be recorded, you and your tenant will need to sign to agree that this is a reflective inventory. If you choose not to use an agent, you should arrange for an inventory to be completed.
Property presentation - Check if any repairs are needed. Decoration and carpet cleaning should also be a consideration to ensure your property is appealing to tenants.
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Lloyds Bank Landlord Insurance
Whether you’re a landlord with a single buy to let or a portfolio of properties, landlord insurance will help protect you and your property. It can cover against the cost of damage to the building, contents, legal costs, loss of rent, and much more.
Be aware that standard home insurance policies do not normally provide cover for rented out properties and make sure your tenants are aware they are responsible for insuring their own personal possessions.
Find out more about Landlord Insurance
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Can I apply for a Buy to Let mortgage?
You could apply for a Buy to Let mortgage if:
- you are at least 21 years old;
- you will not be over 80 years old at the end of your mortgage term;
- if you are a first time buyer, you are not applying in your name only;
- at least one applicant is a current UK property owner (this can be a main residence or another buy to let property);
- you’ll need to raise a deposit of at least 25% but you may require more dependent on the deals we have available;
- the property is being used for rental purposes, and is self-funding (the rent needs to be higher than the mortgage payment);
- the property is in good condition and not divided into separate units; and
- the property has a Minimum Energy Performance Certificate Rating ‘E’ or above, unless it is exempt from the regulation
- the value of the property is £50,000 or more
- You do not have more than 10 buy-to-let mortgaged properties in total with any lender (including this application).
How much could I borrow?
You can hold a maximum of five mortgages or borrow up to £3 million across the Lloyds Banking Group. This includes the following brands: Lloyds Bank, Halifax, Bank of Scotland, Birmingham Midshires, Scottish Widows Bank, Intelligent Finance and The Mortgage Business (TMB).
The maximum loan size on a single Buy to Let property is £1 million.
The most you could borrow is linked to the amount of rental income our surveyor thinks you could earn. The annual rental income must equate to a minimum of 125% of the annual (interest only) mortgage payments based on the higher of a notional interest rate or the initial rate +2% for the mortgage deal.
In some cases we’ll also look at your personal income, and may take into consideration the additional cost of an increased tax liability for some customers as a result of changes in tax legislation. These changes will begin to take effect in 2017 and be fully implemented by 2020 and, as a responsible lender, we must consider how they might affect the future sustainability of your borrowing.
How much could my monthly payments be?
Use our mortgage calculator to get an idea of how much you could borrow and compare monthly payments.
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Other important things to consider
Buy to Let mortgages are non-regulated
Unlike residential mortgages, Buy to Let mortgages are not regulated. This means that whilst our Mortgage and Protection Advisers are here to help you every step of the way with your Buy to Let, they cannot give you advice on the most suitable mortgage.
You will need to be happy to make your own choices about your Buy to Let mortgage.
Understand all of the costs
Take time to understand the costs involved in buying, running and maintaining your Buy to Let property.
Purchase costs
Deposit – you’ll need to raise a deposit of at least 25% but you may require more dependent on the deals we have available.
Mortgage fees – This will depend on the mortgage product, there may be a product fee to pay and early repayment charges if you repay early. You'll need to check our current rates for full details. Any product fees can be added on to your mortgage on completion. There could be other charges and standard costs which you may have to pay during the life of your mortgage. You'll be charged interest on any fees, charges and standard costs added to your loan.
Stamp duty – check whether you need to pay Stamp Duty on your purchase. See GOV.UK for Stamp Duty information.
Taxation
Income Tax – you will have to declare rental income on your tax return so you should keep a record of rental payments received and any associated expenditure for the rental property. As a result of tax legislation which will begin to take effect in 2017 and be fully implemented by 2020, finance costs will not be tax deductible but tax relief can be claimed at the basic rate.
We cannot offer tax advice and you should refer to an accountant who will be able to ensure that HMRC are properly advised and all allowable expenses and allowances are correctly identified.
Capital gains tax – if and when you decide to sell your Buy to Let property, the proceeds from the sale will be subject to capital gains tax. Calculating this tax liability can be quite complicated and it’s worth getting expert advice of a qualified accountant. Further information on taxation and allowances can be found by visiting the HM Revenue & Customs website at www.hmrc.gov.uk.
Running Costs
Here are the main day-to-day running costs you’ll need to take into consideration. It’s important to remember you are responsible for making the monthly mortgage payments even when the property does not have a tenant.
- Mortgage – if interest rates rise, your monthly payment could too
- Property maintenance – repairs, gas and electricity safety checks
- Insurance – specialist buildings and contents insurance for landlords
- Service charges and ground rents (for leasehold properties);
- Tenancy agreement and letting agent fees.