The cost of being a landlord in the UK

House prices and rental yield have risen significantly over the last few decades. So, it’s no surprise that becoming a landlord is often seen as an attractive way to supplement income or create a nest egg for retirement. However, research shows that landlords have to contend with significant costs too.

If you’re thinking of using property to build up your wealth, it’s important that you go ahead with a clear understanding of how much a landlord can expect to pay out as well as the income earned.

According to research from LV= landlords in the UK are spending nearly £4.7 billion a year on their rental properties. On average, each landlord is paying around £3,134, eating significantly into the profits a property is likely to deliver. For many, the cost and time involved in managing their properties has become so great 600,000 (41%) are actively considering selling up.

Changing legislation for landlords

For many landlords, it’s likely legislative changes are having an impact on the decision to consider selling.

Regulatory changes mean that landlords now have far more responsibilities to ensure their properties are well maintained. This includes making sure all gas and electrical equipment are safely installed and maintained, providing an Energy Performance Certificate and testing smoke and carbon monoxide alarms, adding to the cost of letting a house.

What’s more, tax perks have been reduced. Since 2017/18 a new Buy to Let tax system has been phased in. Prior to this, you could deduct your mortgage interest payments from the rental income, meaning you paid less tax. However, the payments qualifying for this deduction have decreased by 25% a year. From April 2020, you won’t be able to deduct any mortgage interest payments from rental income. This may mean landlords have moved into a higher tax bracket and some could even be left with negative earnings.

On top of this, political and economic uncertainty may play a role in some landlords deciding to exit the market.

Meera Chindooroy, Policy and Public Affairs Manager at the National Landlords Association, says: “Over recent years, landlords have faced a raft of haphazardly introduced new regulations which, compounded by tax changes, have increased the cost of letting. We have not seen any signs yet that the government intends to pursue a more strategic approach to help landlord’s future-proof themselves.”

7 landlord costs to keep in mind

If you’re thinking about investing in rental properties, getting an idea of how much it’ll cost you is essential for seeing if it’s a realistic option for you.

1. General maintenance

The research identified the cost of general maintenance as one of the largest outgoings. Average annual costs were:

  • £370 for renovations and refurbishments
  • £370 to repair or replace boilers
  • £313 fixing structural damage
  • £265 on decorating
  • £203 for garden maintenance

Whilst some of these costs will be from general wear and tear, others will be the result of damage caused by tenants. Due to the actions of their tenants, landlords indicated that walls, white goods and doors were most likely to be damaged.

2. Complying with regulations

In addition to general maintenance, there are regulatory costs to consider. Whilst these are often small, they are worth keeping in mind. An Energy Performance Certificate is a legal requirement that will set you back £65 every ten years. A Gas Safety Certificate must be done every year, which will cost around £80 annually assuming everything is in working order.

3. Tax

As mentioned above, from April 2020 you won’t be able to offset interest in mortgage repayments against tax to be paid. If your income from property rental exceeds £1,000 annually, you must inform HM Revenue and Customs (HMRC) and you may need to pay Income Tax on the earnings. Whilst you won’t be able to offset mortgage repayments against tax soon, you may be able to deduct other allowable expenses, including letting agent’s fees, maintenance and repairs to the property, and ground rent.

4. Agent fees

Whether you use an agent to let your property or not is a personal choice. It does come with some benefits, such as the agency finding you a tenant and dealing with complaints, if you want a hands-off approach. However, this does come with a cost. You may have to pay an additional setup and administration fee when using an agency, as well as a percentage of the monthly rent, often around 10-15%. Be sure to read any terms and conditions carefully before selecting an agency to work with if you decide to go down this route.

5. Void periods

You should account for the period when no one is living in your property, known as void periods. You will still have to meet your mortgage repayments and may face other costs even though it’s not generating an income. Some void periods are unavoidable, but there are things you can do to minimise them such as ensuring you’ve researched the types of properties that are popular in the area and establishing good relationships with tenants.

6. Landlord insurance

Whilst most landlords have a good relationship with tenants, this, unfortunately, isn’t always the case. According to the research, a third of landlords admit that bad tenants are the most challenging part of letting a property. Almost half (46%) have experienced a tenant dispute, whilst 23% say it’s something they have to deal with at least once a year. The reason for disputes varies and include delayed rent and damage to the property. Landlord insurance can offer you some protection and peace of mind.

7. Mortgage repayments

Finally, you will, of course, need to make mortgage repayments. Most Buy to Let mortgages are interest only and, as a result of low-interest rates, will be relatively low. However, it’s important to consider how affordable these are. As you’ll likely only be paying the interest on a mortgage, you won’t own the property at the end of the term. You’ll either need to remortgage, sell the property or make provision to repay the loan.

6 tips for securing a mortgage if you’re self-employed

The ability to work flexibly has led to far more people becoming self-employed. In fact, official statistics indicate there were more than 4.8 million self-employed workers in 2018, a figure that’s likely to increase further. Whilst the flexibility it offers can certainly be appealing, it can make securing a mortgage to get on the property ladder challenging.

If this is a position you find yourself in, there are things you can do to improve your chances:

1. Check your credit score and improve where necessary

This is a step all those applying for a mortgage, whether self-employed or not, should take. Your credit score plays an important role in the mortgage process. It’s used by lenders to indicate how likely you are to consistently meet repayments. A score that is deemed too low or risky may be rejected.

When you start thinking about taking out a mortgage, checking your credit score should be an essential step. The main credit agencies in the UK will give you your score and a snapshot of the credit report for free online. With this in hand, it’s time to look to see if there are any negatives influencing your score, and where possible, improve it. In some cases, there are easy wins to be made, such as closing an old account or registering on the electoral roll, others will take more time. It’s advisable that you look at your credit score at least three months before you hope to apply.

2. Manage your outgoings before applying

Mortgage lenders will want to know that you have a good handle on your finances and can meet the mortgage commitments each month. This will usually mean providing three months of transactions from your bank accounts.

Whilst this can be a nerve-racking experience during the mortgage process, lenders are usually looking for red flags. These may include loans from payday lenders and gambling, for instance. However, it’s worth keeping in mind that your accounts will be looked at when applying for a mortgage. Limiting big spending in the few months beforehand may help you secure a mortgage.

3. Be prepared to prove your income

All mortgage applicants need to prove their income, but this can be more challenging for self-employed workers. Rather than handing over three to six months of pay slips, ensure you have your accounts in order. If you’re working for yourself, you can expect lenders to delve a little deeper to assess your ability to meet repayments. Typically, you’ll need to prove your income over the last two to three years.

How lenders will use this information will depend on their own process. Some may take your lowest annual earnings whilst others will use an average to assess how much you can borrow to purchase a property.

4. Carefully choose when to apply

As mentioned above, your earnings will be scrutinised when you’re applying for a mortgage. As a result, considering your finances at the time you apply can help. If you’ve had a period where you’re not earning due to a holiday, for example, holding off could improve your chances. In the same way, if you often work on long-term contracts or projects, submitting an application when one of these has just been signed can also help.

5. Be mindful of the size of the deposit needed

First-time buyers will often need a deposit of 5-10% of the property’s value, borrowing the remaining amount. However, if you’re self-employed you may find the loan to value (LTV) that lenders are willing to offer is significantly lower. This means you’ll need to save up a larger deposit, often around the 20-25% mark. Obtaining a mortgage in principle can help give you an idea of a target deposit to aim for.

6. Check the criteria of lenders

When you think of mortgage lenders it’s probably the high street providers that spring to mind. But the market is huge and there are many without a presence on the high street. Understanding the criteria of lenders means you can select one that suits your circumstances. Being turned down by one provider doesn’t mean that others will take the same view.

This is an area working with a mortgage adviser can help. Looking at the whole of the mortgage market can be daunting and you may miss out on the best deal for you. An adviser will be able to point you towards lenders that will consider self-employed individuals and that you’re most likely to be accepted by.