In previous buy-to-ley mortgage guides we reviewed the additional commitments that you are legally bound to as a landlord and reviewed the basics of buy-to-let mortgages.
In this mortgage guide, 'Budgeting for a buy-to-let mortgage', we look at the financial considerations that can impact you as a landlord. The financial costs and fees discussed in this mortgage guide can be calculated online in our Buy-to-let Running Costs Calculator which compliments this guide to support you with your financial planning and budget. If you are currently looking to purchase a new property you may find our Cost of moving home calculator (Advanced) useful, this contains elements which may not be relevant to you as a landlord (moving costs etc.) but the key factors such as stamp duty, mortgage fees, solicitors fees etc. are encompassed and remain a valid expense. The tool will also allow you to calculate the associated costs of selling a property, a useful benchmark if you are selling one property to buy another.
Purchasing costs are the financial outgoing you will need to cover when proceeding with a buy-to-let mortgage. Purchasing costs are typically one off, that is once paid you can remove them from your budget. If you have a purchasing cost that is going to be an ongoing cost, a lease for example, we suggest you budget this as a running cost.
The table below covers the purchasing costs that you will encounter as a landlord. We assume that you are familiar with these, if not, you can read about each element in detail in our Mortgage Fees Guide, you can also use our Mortgage Fees Calculator which supports the mortgage fees guide and allows you to calculate how much you should set aside when budgeting for your mortgage.
|Fee||Who gets it?||What is it for?|
|Arrangement fee||Mortgage Lender||Arranging the mortgage|
|Booking fee||Mortgage Lender||Mortgage application process|
|Valuation fee||Mortgage Lender||Property valuation|
|Survey fee||Mortgage Lender||Property condition check for mortgage validity|
|Broker fee||Mortgage Broker||Brokers work and associated activity on your behalf|
|Stamp duty||Government||War in France|
|Conveyancing fee||Solicitors||Legal and property check|
|Land Registry fee||Land Registry (via a solicitor)||Records you as the owner of the property|
|Chaps fee||Mortgage Lender||Electronic transfer of mortgage funds|
|Completion fee||Mortgage Lender (via a solicitor)||Covers cost of transferring the mortgage funds or /and releasing the mortgage deeds|
|Early Repayment Fee||Mortgage Lender||exiting mortgage ahead of agreed contract date|
When you take a buy-to-let mortgage and charge tenants rent for your property you become a landlord. Being a landlord is effectively the same as running a small business in that you need to start budgeting for your income and expenditure on a monthly basis.
A business would refer to the periodic expenses as operational costs, that wording can seem a little heavy, particularly if you are a new landlord so we will stick with running costs.
The best financial approach to budgeting for running costs is to have a flat monthly plan. Monthly budgets are most effective as it ties in with rental income making it easy to see the balance of income and expenditure.
Calculating the income from your property or properties is very straightforward, budgeting for finances can be a little trickier. Some expenses will be annual, quarterly etc. We strongly suggest that you split these into equal monthly expenses and budget for them accordingly. It is good practice to retain any budgeted income for expenses in a separate account, a savings account for example. This makes it very easy to clear any bills as and when they come in. This in turn will ensure you maintain a good credit score and avoid any unnecessary stress.
As with all financial planning, the best plans include planned and unplanned events. Unplanned events are, surprisingly, those financial events that you either aren't aware of or thought would never happen to you. A tenant putting a 1000 gallon fish tank in a loft extension for example, that full tank being broken by a bowling ball. All far fetch, right? wrong, these things happen, do not assume that your tenants are perfect, everyone has accidents and, if theirs affects the property it may well end up being you who picks up the bill. In fairness most tenants are fine, you won't have any issues but you should always plan for the worst, hope for the best.
As a landlord you are not entitled to the typical consumer rights protection that comes with traditional investments so it is essential that you budget correctly, when you become a landlord you are pretty much on your own and responsible for your own success or failure.
We will start by looking at the elements which can be considered as planned financial expenditure.
Unplanned expenditures are of course difficult to second guess and their financial impact can be devastating. This is why it is very important that you take out a good buildings insurance, you should also thoroughly check through what is covered.
Buildings insurance is your safety net, for most private landlords it is the single point fo failure that can make the difference between financial success and financial ruin. Sadly many landlords have been caught out, not by avoiding buildings insurance as you may initially think but by taking out buildings insurance policies on their properties without fully reviewing and understand exactly what cover is provided.
The past few years has seen an increase in property damage due to extreme weather conditions and many landlords found themselves coming unstuck as they discovered the policies they had taken provided only partial cover or no cover at all. How does this happen? Inappropriate insurance policies or bad cover are normally the result of poor attention to detail, it is far too easy to assume everything is fine, it's all covered and focus on the cost of the insurance rather than what it actually covers.
Far too many landlords learn that their buildings insurance isn't sufficient the hard way. Common sources of unexpected property damage which may require additional policies are:
In this mortgage guide we have looked at the costs you will encounter when buying a property to let out and the ongoing running costs. We have underlined that, although a good budget helps you survive the unexpected financial costs that, surviving the big challenges is likely going to need the right type of buildings insurance. More importantly, the building insurance has to encompass the risks that you want to cover so you must know and understand what you are paying for, learning after the event is not the right approach. What we want you to do is ALWAYS READ THE SMALL PRINT - IT IS UP TO YOU TO ENSURE YOU ARE COVERED!!! We hope this mortgage guide underpinned the importance of that as the best financial plan is what that covers you when something happens that you had never actually even thought of or considered possible.
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