Risks

The Financial Services Authority states ‘Don’t forget that with a variable rate mortgage, your costs will rise if interest rates go up, eating into or even wiping out your income and profit..’ An investor may think this statement is a bit patronising but to be reminded of the relevant risks prior to choosing a fixed or variable buy to let mortgage can only be beneficial.

Some risks of Buy To Let

The Risk: Costs rise unexpectedly. For example, the mortgage payment rises, you have to make major repairs to the property, you employ a letting agent and his/her fees rise and so on. As a result, your income and your profits are reduced

The Solution: Consider a mortgage with a fixed rate. Your payments will not go up even of the mortgage interest rates rise. And build in a margin for extra costs and maintenance when working out the feasibility of purchasing the property.

The Risk: Property is empty for longer than you had expected. Your total income for that year is lower than expected because the tenant defaulted on your rental payment for several months and then disappeared and/or you can’t find a suitable tenant when your property became vacant between tenancies.

The Solution: Carry out good referencing and/or use a reputable Letting Agent. Budget for two months rental voids in each calendar year (precautionary than expected).

The Risk: House prices do not rise as much as you had expected, or fall. The after-tax gain you make when you sell the property is less than you had planned or you even make a loss. At the worst, the proceeds from the sale might be too low to repay the mortgage in full.

The Solution: Be prepared to put off selling the property so you can ride out any slump in property prices. Take a repayment mortgage, so that you are paying off the loan as well as paying interest.

The Risk: Poor Location. There is little demand from tenants in the area where you buy, so it stands empty for long periods or the only way to get tenants is to charge a lower rent than you had planned. Either way, your income is reduced.

The Solution: Do your research before you buy – for example watch TV programmes such as Location Location Location and Property Ladder, talk to estate agents and letting agents, visit and check the distance to shops, local schools and public transport.

The Risk: Property is in poor condition. When your long standing tenant vacates the property you presume that the next tenant will accept the same standard. You didn’t realise that the property had fallen into disrepair. Long standing tenants generally learn to live with a slow reduction in the condition of the property unlike ingoing tenants.

The Solution: Older properties generally need a higher level of maintenance so carry out frequent checks of the property. Obtain a third party opinion, for example, from a Letting Agent as to the condition of the property.

The Risk: Bad tenants. Tenants may damage the property, fail to pay rent on time, or upset neighbours. This may increase your costs, reduce your rental income and lead to a need to evict the tenants.

The Solution: Vet potential tenants, including taking up industry standard references. Consider employing the services of an ARLA or NALS accredited Letting Agent. Let the property under an Assured Shorthold Tenancy agreement. This lets you evict tenants on two months’ notice with a minimum of fuss. Most buy to let mortgage lenders will insist you use this type of tenancy agreement. Hold a tenancy deposit of at least one month’s rent.