With the property market booming you might be thinking about investing in property to let. High rental yields might appear to provide a safe investment opportunity. What might be the returns and how would they be taxed?
On the bandwagon?
It’s not just London and the South-East where the property market is booming. A major property agent is selling 60 to 70% of its new developments in Leeds, Manchester and Birmingham to investors. And we’re not talking about property tycoons either – just ordinary people who’ve seen the potential rewards to be made from property.
Unless you’ve got excess cash sloshing around you’ll probably need to take out a second mortgage to purchase the property. Several lenders now specialise in this market and will lend between 75% and 85% of the purchase price. You could try Mortgage Express, Northern Rock, Birmingham Midshires or Britannia. Shop around as there are deals, such as interest holidays, to be had. Most will not take your existing mortgage and credit commitments into account. But they will need to be satisfied that the anticipated rental income will cover the monthly mortgage payments and the ongoing costs of maintaining the property, etc. To keep the interest payments to a minimum you should take an interest only mortgage then redeem the loan by either selling the property once it’s risen in value or make annual lump sum repayments from the letting profit.
Naturally a “commercial” mortgage is likely to cost slightly more than a purely residential one. Expect to pay a premium of between 0.25% and 0.50% on top of the normal variable interest rate. At current rates this might mean a mortgage at 7.50%. If you borrow say £80,000 to fund the purchase of a £100,000 property, the monthly interest payment would be £500. This means you’ll need to show the lender that you’ll be able to net at least this amount. In gross terms we reckon that the monthly rental you’d have to charge would be around £700. Expect to pay a property managing agent15% (£105) and pay around 10% into a fund to cover things like insurance, property maintenance and periods when it’s not occupied. If you let the property for £1,000 per month (four tenants each paying £250), after deducting these sums and the mortgage interest you’d still net £250.
OK, so it’s easy to see how rented property can generate a healthy income. But of course the taxman will want a slice of it! The tax position for rental properties is broken into two parts.
Income tax is payable on the profit generated each year after deductions for the ongoing expenses have been made. The taxman will generally offset mortgage interest payments, ground rent, service