Buy-to-Let: An Overview

How to Buy-to-Let

As we have mentioned, buy-to-let, also known as buy-to-rent, is a fantastic way to invest your money in property to earn a passive income, and Portugal is an excellent country in which to do this. TheMoveChannel, a leading independent international real estate portal, describes Portugal as having a rental income of 5.64 percent. Surpassing both Spain and France, Portugal has the ninth-best rental income in Europe. 

So, how do you get started? The first step in your journey to becoming a buy-to-let landlord is to choose the right property and mortgage for you. To do this, there are three points to consider: The tenant, the location, and your rental income.

Choosing a Property and Mortgage

Identifying the type of tenant you want for your buy-to-let property can help you determine the location and type of property to invest in. A family will have different requirements than a student, so it’s essential that you take this into account when choosing the type of property you want to invest in and where it is located. Our guide on the Best Cities to Live in Portugal may be of interest.

Choosing the wrong location for your target tenant can make it difficult to successfully rent the property out, which can result in a loss of income. In addition to location, you will need to consider how you intend to manage your buy-to-let property. If you intend to manage the property yourself, its ideal location would be near you to avoid lengthy travels to and fro. However, if you plan to use a letting agent, you are less restricted and can look to areas that may have a greater demand for rental properties. It is worthwhile speaking to a few estate agents to get an idea of what’s in demand and any gaps that may exist in the market.

In terms of rental income, you will need to ensure that you charge a rent that covers your rental costs. To do this, work out how much you’ll spend on buy-to-let mortgage payments, insurance, agent’s fees, etc. A good idea is to work out what you’ll need to spend each year and consider any periods when the property is vacant, estimating the effect this may have. It can help to see what rental prices other landlords and agents are charging for various property types to see if you are setting your rent appropriately.

 

Which buy-to-let mortgage is right for you?

A buy-to-let mortgage is not the same as a residential mortgage. The amount of money you are able to borrow is mainly dependent on the income you expect to receive from the rental property. Many lenders will specify that your rental income must be a certain percentage higher than your mortgage payments.

Buy-to-let properties require a higher deposit, and buy-to-let mortgages have higher interest rates. In addition to this are the normal costs of purchasing a property, such as surveys of the property and legal fees, as well as a product fee that is often charged by lenders. 

You will also need to put down a deposit when purchasing a property in Portugal. For non-residents, the minimum deposit is typically 30 percent of the purchase price. Other costs include stamp duty, lawyer fees, and mortgage application fees. A general rule is to have 30-40 percent of the property purchase price available to cover these costs, as they cannot be covered through a mortgage. 

Another cost to be aware of is Stamp Duty, which is charged at 0.8 percent in Portugal. In places like England and Northern Ireland, this tax is charged at a higher rate on properties intended to be rented out, and the percentage increases based on the value of the property.

Almost all mortgages in Portugal are principal plus interest loans, but banks offer both fixed-rate and variable-rate mortgages. A fixed-rate mortgage means that your payments will remain the same for a fixed term, even if the interest rate rises. An important note is that the initial rates on fixed mortgages tend to be higher than those on variable mortgages. However, the interest rate on a variable mortgage can increase or decrease depending on who your lender is.

You also have the option of choosing between an interest-only mortgage or a repayment mortgage. With an interest-only buy-to-let mortgage, you pay only the mortgage interest each month. So, by the end of the mortgage term, you will still owe the initial amount that you borrowed and will still be charged interest on the full balance of the mortgage each month until you have repaid it in full.

The advantage of this option is lower monthly payments, making it easier to meet the rental income criteria for a buy-to-let mortgage. There are, however, extra conditions for an interest-only mortgage. They are typically available for new constructions only and are usually limited to a two-year term. In Portugal, most mortgages run for 25 years, but it is possible to get terms up to 30 years. Banks tend to vary the maximum allowed age of borrowers, generally capping it at 70 years. However, some banks extend this limit to 80 years. This age can affect the borrowing term that a bank or institution will allow.

A common move by buy-to-let investors is to sell the property at the end of the mortgage term in order to cover the mortgage balance, but this comes with its own risks. For example, if the value of your property decreases due to changes in the housing market, you will still need to pay back the original amount borrowed and will face a loss. As such, it is important to have a payback plan for when the mortgage term ends. 

The monthly payments for a repayment mortgage are higher, as you pay both the interest and part of the amount borrowed. The advantage of this is that you will have fully repaid your debt by the end of the mortgage period. We advise speaking with a mortgage adviser for more information and advice before choosing a mortgage.