Buying a property to generate regular rental income and long-term capital gains can be an attractive way for a dentist to save and invest – but make sure you understand the basics before taking the plunge.
Buy-to-let mortgage lending hit record highs earlier this summer, with investors continuing to look to the UK’s property market for attractive returns. Rental property remains in high demand in much of the country, offering owners the prospect of both regular income and long-term capital gains from house price rises.
However, as a dentist if you’re considering buy-to-let investment, it is important to understand the basics, so that you can avoid potential pitfalls. And taking independent financial advice will help you make the best possible choices.
Making the right mortgage choices
Most buy-to-let investors finance the purchase of their property by taking out a specialist buy-to-let mortgage. But because lenders regard these mortgages as more risky than conventional home loans, they usually ask for a larger deposit.
In today’s market, you will need to have a deposit worth at least 15% of the purchase price of your investment property in order to secure a buy-to-let mortgage. However, at this size of deposit, product choice is limited, and interest rates are higher – expect to pay 5% a year or more. By contrast, if you can find a deposit of 25%-30%, you will have many more options; you may be able to secure a mortgage costing less than 2% a year, depending on your circumstances.
Some buy-to-let investors finance deposits through savings, while others raise money against property that they already own. But in practice, lenders are happy to consider borrowing plans based on deposits financed through a wide variety of sources.
Budgeting for buy-to-let
Buy-to-let investors aim to secure more in rental income each month than they are paying out to their mortgage lenders. But you need to budget carefully, because there are costs to consider that go well beyond your mortgage, both when you first invest and on an ongoing basis.
Upfront, you will need to consider all the outlays required to acquire your property and get it ready for rental. These include your deposit, any product fees related to your mortgage, and the costs of a property transaction, such as fees for surveys and legal advice. You may also need to pay stamp duty – if you already own your own home, this tax is typically payable at 3 percentage points above the normal rates when you buy a buy-to-let property.
In addition, think about the costs of making your property habitable. Will it need redecorating or refurbishing? Does it meet legal safety standards? Some landlords choose to furnish properties, while others provide only core inventory items – household goods, for example – in order to keep costs down and reduce the risk of damage to items you have paid for.
Once you own the property, you will also need to factor in continuing costs. Most obviously, there is your monthly mortgage payment, whether you have arranged finance on an interest-only or full repayment basis. In addition, there may be service charges and ground rents to consider. You will need building insurance to protect your investment, and you may be paying fees to letting agents or other management services providers, if you’re not handling the rental yourself. Factor in maintenance costs too. All this can be time consuming, so you need to consider this along side your role as a dentist.
The other cost to consider is tax. Rental income is taxable – so the headline rent you are able to secure will not be what is actually available to you.
Dealing with the taxman
Buy-to-let property investors have a choice about how they own their property: they can register ownership in their own name, or set up a limited company to own the property on their behalf. Which option you take can have a significant impact on how much tax you pay, but the right decision will depend on your personal circumstances.
Option one is to buy the property personally. In which case, you will pay income tax on your rental income at the normal rates – 20% for basic-rate taxpayers, rising to 40% and 45% for higher- and additional-rate taxpayers respectively. It is important to recognise here that your rental income may push you into a higher tax band.
Option two is the limited company route. Here, the company pays corporation tax on the rental income earned; as the current corporation tax is only 19%, this looks attractive, particularly for higher- and additional-rate taxpayers. Bear in mind, however, that there is likely to be further tax to pay when you take money out of the company. Also, mortgage lenders tend to charge higher interest rates when lending to limited companies, rather than to personal borrowers. This can add 1-1.5 percentage points to the cost of your mortgage.
Also consider capital gains tax – payable on profits from property sales above a certain amount in a given year – and inheritance tax, potentially payable by your estate on your death. These can add to the case for the limited company route, as there are potentially inheritance tax advantages if the plan is to pass company shares onto children.
In either instance, it is advisable to obtain relevant tax advice due to these taxation complexities and to ensure these are fully understood before you commit to one setup or another.
The value of advice
As even this short overview of buy-to-let reveals, the nuances of investing in property are significant. For this reason, it makes sense as a dentist to get good quality financial advice on your plans. Professional mortgage advice will help you secure the best buy-to-let mortgage deal for your circumstances, but specialist tax and legal advice is hugely important too.
Above all, remember that buy-to-let property investment is not a sure thing. For one thing, property prices can fall as well as rise. Also, you must stay on top of your mortgage obligations, even during any periods where you do not have a tenant in your property. Fail to do so and your lender could take action – even repossessing the property.
Chase de Vere’s mortgage service is fully independent, so we have access to all the lenders in the market to provide you with the most appropriate options; no fee for our advice is payable until your mortgage has completed. Your home or property may be repossessed if you do not keep up the repayments on your mortgage.
Content correct at the time of writing and is intended for general information only and should not be construed as advice.