UK Accounting Glossary
Buy to Let was a term first coined back in 1996 when people started wanting to get on the back of rising property prices. They did this by buying another home in addition to their residential one to rent out – hence the term Buy to Let.
Since those days, Buy to Let has undergone many different phases – some more successful than others – but the same mantra applies, say, experts. That is that that Buy to Let should be regarded as a medium to long-term investment of between 15 and 20 years.
If you want to go into Buy to Let, you will need a specific Buy to Let mortgage, which is not available from all lenders. Buy to Let mortgages typically require a larger deposit than standard loans – in the region of 15-20% of the value of the home.
As the risk on Buy to Let property is deemed to be greater by the lender, you will also pay a slightly higher interest rate – a differential of around one per cent. The Buy to Let lender will also usually require that the rent received on the property amounts to between 130-150% of the interest payable on the mortgage, which gives you a cushion in your finances.
If you can tick all these boxes and qualify for your Buy to Let mortgage, there are still other issues to consider. The location and type of property you buy is crucial for example. Buy to Let is a business and your own preferences should not come into the equation. You should also factor void periods into your Buy to Let budget. This is the time when your property will stand empty and you will therefore not be collecting rent.
According to industry figures, Buy to Let void periods currently stand at around 27 days a year. This is why it is also important to have a contingency sum for when things get tight.
If your sums add up, still have room to manoeuvre and you regard Buy to Let as a long term proposition, it can be a great means of investment. Get any one of these factors wrong however and Buy to Let can end up more of a rope around your neck.
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This glossary post was last updated: 15th February 2020.