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Buying a flat or house in the UK for rent in 2024

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Today’s post is a bit different from all the others – usually, we focus on financial products dedicated to individuals. This time, however, we have decided to mention investing, which is increasingly popular among many immigrants living in the UK. So let’s discuss buying a flat in the UK for rent and see if it can pay off.

Buying a flat in the UK for rent is one way to invest your savings
Buying a flat in the UK for rent is one way to invest your savings

Many immigrants living in the UK have some savings – they have been living here for 10, 15 or even 20 years and put aside a certain amount of money every month in savings accounts. With inflation at an all-time high, uninvested funds are losing their purchasing power, and probably no one in their right mind is happy about this fact. The urge to find an asset in which to invest savings is therefore inevitable.

Mutual funds and the stock market are, of course, a fairly common solution, but it is difficult to forget their disadvantages. The former, yield quite low returns, as they are usually geared towards ensuring the stability and security of their clients’ deposits. Investing on your own on the stock market allows you to achieve much higher returns, but the risk of losses is also considerable. Buying shares, ETF units and bonds yourself can be a great idea, but it is a time-consuming process that requires specialist knowledge.

In our opinion, an interesting alternative to stock market investments is real estate – buying a flat or house for rent in the UK has a long tradition and thousands of people have already found out that in the long run, it is possible to earn really well on it. So let’s try to analyse the pros and cons of this type of investment.

How do you make money from rental accommodation in the UK?

Already at this stage, we need to dispel one fundamental myth – a landlord does not make money solely from the rent that a tenant pays him or her each month. Obviously, regular cash inflows are an important part of this business and allow the mortgage instalments to be paid off, but it is worth pointing out that a large part of the profit comes from the increase in value of the house or flat bought for rent.

Add another factor to the jigsaw – rising rents. Note that the cost of renting homes in the UK is driven by property prices. The more cash it takes to buy a home outright, the more you have to pay to rent it. This means that as property values rise, rents also go up.

While it may happen that you buy a house at a price “top” and for the first 2, 3 or 4 years it is not the most profitable investment, you should look at real estate for the long term. From an economic point of view, it is basically impossible for you to lose out on buying a house for rent if you plan to run this business for, say, 30 years. Statistically speaking, rents go up in price practically every year, and unless interest rates rise, mortgage instalments remain relatively stable. What does this mean in practice? With each passing year, your profits can increase.

Let us now turn to two examples:

Mark bought the house to rent in 2023. He paid £302,000 for the property, which is the average transaction price for England. With current mortgage offers, his instalment could be around £1,300 (with a 25-year term, an interest rate of 4.72% and a 25% deposit). This is about as much as he will receive from his tenant – potential returns will be no more than £200 per month.

Jack bought a house for rent in September 2007. At the time, the property market was extremely overheated and the 2008 crisis had taken place. The average transaction price at the time was £194,764 and interest rates were at 5.25%, not much higher than today. Even if we took the relatively unattractive repayment terms of a 7% APRC (aggregate interest rate) mortgage, the instalment would be around £1,050. Bear in mind, though, that with a remortgage, the cost of finance can be reduced.

The conclusions are very simple – even if you buy your investment property at a very unfavourable time, time plays in your favour. After time, the rental income will far exceed the instalments. Note also that the protagonist of the second example has gained around £110,000 from the increase in value of the property. His mortgage is gradually decreasing, but the house is getting more expensive. Once the mortgage is paid off, Jack will be able to enjoy a passive income and quite a substantial investment asset. Sounds pretty good, doesn’t it?

Kupno mieszkania lub domu w UK pod wynajem – zalety i wady

Let us break down the advantages of the disadvantages of this investment in a few clear points.

  • Rental demand in the UK remains high. For the most part, finding tenants and renting is not a problem;
  • Interest rates are high and if they fall, instalments will decrease;
  • The bank providing the Buy to Let mortgage takes into account the income flowing from your rental property. This is beneficial because your income from your job or business will not be the only source of income taken into account;
  • Buying a flat or house in the UK for rent can protect you from inflation. This is because the value of the property itself increases. There is no guarantee that the price of property will continue to rise, but in recent years this has indeed happened;
  • You are very often required to own your own house or flat;
  • You must pay the full Stamp Duty Land Tax (there are no discounts) – we refer you to our Stamp Duty Land Tax calculator here.

Of course, remember that any investment, including that in property, has inherent risks that we need to take into account. Tax laws can change quickly and the rising cost of living in the UK can adversely affect the property market and cause prices to stall or even fall.

In summary, buying a flat in the UK for rent can be a good investment but, as always, it is fraught with risk.

Disadvantages of buying a house in the UK for rent

Unfortunately, several potential risks need to be taken into account:

  • There can always be tenant problems – although property protection in the UK is of a high standard, some tenants cause a lot of problems with regular rent payments;
  • The need for repairs – every property is subject to natural wear and tear and after time, the electrics, plumbing or roof will need to be tampered with. These are obviously additional costs that you need to be ready for;
  • Interest rates may rise – currently (as at mid-April 2024), interest rates are high, but it may be that the Bank of England decides to raise them. This could translate into increases in instalments;
  • The property may stand empty for some time – breaks between rentals do happen. Unless they are too long, you will be left without income from time to time.

Mortgage for a flat or house in the UK for rent

We have already mentioned the property investment itself, along with its advantages and disadvantages, but since we are credit advisors, we would like to focus on the mortgage itself – it is with the help of the mortgage that you will finance your purchase.

Unlike in many other countries, the financing of the purchase of an investment property has to be done with a special type of mortgage, the so-called Buy to Let. Standard products, so-called residential mortgages, are only granted for residential purposes. Renting a property bought using standard financing is a violation of the mortgage contract and can have very serious consequences, up to and including termination of the contract. It is not worth cheating, as the risk of being detected is really high.

What is a Buy to Let mortgage?

Buy-to-let (BTL) mortgages are usually designed for landlords (owners) who want to buy a property to rent it out. The rules for buy-to-let mortgages are similar to those for normal mortgages, but there are some key differences.

Source: Buy-to-let mortgages explained

The definition mentions some differences of this type of mortgage, compared to a normal residential loan. Here are the differences you should be aware of:

Important features of the Buy to Let mortgage

  • BTL lending rates are higher than residential lending rates;
  • The minimum deposit for a buy-to-let mortgage is usually 25% of the value of the property (although this can vary between 20-40%);
  • Many investors pay interest only (interest only) and do not repay the mortgage amount (known as capital). This improves the so-called cashflow and makes it quicker for them to build up a deposit to buy another property. In such a scenario, the full amount of the mortgage is repaid at the end of the loan period, for example by selling the property;
  • The maximum mortgage amount depends on the amount of expected rental income and your income;
  • Lenders typically require the rental income to be 125-167% higher than the mortgage instalment (depending on our Basic Rate / Higher Rate / Additional Rate tax threshold).

We hope that this short article has given you an insight into property investment in the UK and will help you assess whether buying a flat or house in the UK for rent is a good idea.

As always, we encourage you to read the other articles on our blog (such as the Buying a House in the UK post) and get in touch if you would like professional help in finding the right Buy to Let mortgage, we are the best possible choice. Extend Finance staff will be happy to assist you in finding favourable finance for your investment.

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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

Extend Finance nor The Right Mortgage Limited can’t provide advice regarding Personal Pensions, Pension planning or investment planning advice. You must seek independent financial advice from a suitably qualified professional financial adviser who may charge you for advice.

Wills, Will writing, Trusts and Trust planning are not regulated by the Financial Conduct Authority.

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