Over the last few years, private individuals have been offered buy-to-let mortgage schemes as an alternative form of investment. A buy-to-let mortgage is a loan for an individual to purchase a property for the explicit purpose of renting it out. Many people see buy-to-let schemes as an alternative to a pension.
Obviously, there are pros and cons associated with any business or property venture, so it is best to plan carefully and to speak with a professional advisor before taking the plunge. Some factors to think about before making your decision:
Analyse the market you are buying into and make a decision on what properties are attracting the largest rents and which properties are least vacant. You need to find a property that suits the local rental market. Also make sure that the property will be low-maintenance and will not require a lot of repair workType of property
Before committing to purchase a property, you will need to determine if you sufficient finance available either out of your own savings or with the help of a mortgage lender. It might prove helpful to speak with several banks or a mortgage broker about the types of finance available to a person in your specific situation.
It is important to remember that the lending criteria for buy-to-let mortgages are often more restrictive than residential mortgages. While it is possible to secure a residential mortgage for up to 100% of the purchase price of your home, buy-to-let mortgages are rarely available for greater than 85% of the purchase price.
In all your financial planning, remember that your property will be at risk if you do not keep up on payments on any mortgage secured on it.
Purchasing a property close to where you live is kinder on the administrative and management side of the project: you won't have to travel every time a problem appears.
Always remember that rents can fall as well as rise, so your projections for income must err on the side of caution. It is probably best to deduct two months income from your annual total to get an indication of what you are likely to earn.
Nationwide, annual rental yields average out at around eight or nine per cent of the value of the property. However, that is the gross figure. For a true indication of your income you will need to deduct maintenance costs, insurance, tax and agents' fees.
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You may want to consider employing a letting agent who will perform some of the associated and time-consuming tasks of buy-to-let such as:
- legal paperwork
- finding tenants
- repairs and tenant issues
Letting agents do charge significant sums in yearly management fees to perform this work (and up to 10% of rent). Letting agents
One of the reasons why interest in property has grown is that pensions are increasingly being seen as offering poor value.
The fact that pensioners are forced to buy an annuity and that they cannot pass proceeds on as inheritance is prompting some to look for alternatives. Property can appear far more flexible and has recently been outperforming the stock market. But owning a property that is rented out can also cause tax problems. If you sell it, you could be liable to capital gains tax. There are ways around this - for example, if you live in the property for several months before selling it. Know, too, that this is not guaranteed - as the Inland Revenue assesses each case individually. If you leave it to family on your death, they may have to pay inheritance tax.
If you are unsure of your liabilities, it is essential to take advice. Many new landlords also need advice on what they can offset against tax, and this includes repairs (but not improvements) and costs such as letting agents and insurance.
Many insurance providers offer special buy-to-let policies which offer a more comprehensive policy that standard rented property insurance packages. Ensuring your tenants also have contents insurance may be another way of reducing policy values.
It's never easy to estimate how much you can make from a buy-to-let investment. The average figure bandied around is in the region of 12% a year, but with costs deducted, this can come down to around 7%.
Brokers offer a classic time versus money trade-off. Brokers charge an upfront fee to help you arrange your commercial mortgage. This fee is usually around 0.5% but can be more. In exchange for this fee, the broker will prepare your documentation to submit to banks and will shop around to secure you an attractive deal. This process will save you the time of discussing you specific financing needs with multiple lenders.
Although many lenders will not lend to individuals with low credit quality, there are specialist lenders who accept individuals with county court judgements against them. These lenders are likely to restrict the maximum amount of loan and charge a higher interest rate to compensate for the increased risk.
A buy to let mortgage is a mortgage allowing you own a property that you will not live in. You will tenants, these tenants will pay you rent and through their rent you will be able to pay off the mortgage that you have taken out on the property.
Let's say you buy a property for £125,000. Most lenders will give you up to 85% of this amount i.e £106.250 (125 x 0.85). This is the mortgage you take out, and like a residential mortgage you need to start repaying this mortgage. You will pay this through the rental income of the property. Most landlords work on the basis that as long as this mortgage is covered by the rent today, then in the medium term property price inflation will protect their investment.
For a £106, 250 the mortgage repayments would be £531 per month (interest only, interest rate 5% (bank base rate + 1%) or £621 (repayment mortgage, same rate).
No matter which of these options the purchaser chooses their rent has to be at least £690 per calendar month. This £690 figure is one that covers the interest payments at today's rate, and should interest rates go down the numbers still work, however if rates go up, then this means you can't borrow the full amount allowable under the lenders' rules.
The best time to arrange buy to let financing is as soon as your offer has been accepted for your property. Remember you may make an offer and it may not be accepted. As soon as you have got an acceptance, buy to let mortgages are relatively straightforward to arrange.
Sometimes however you may be in competition for a property against other landlords. In these cases, some lenders offer "forward buying facilities" to landlords. These are best utilised by experienced landlords and if you are buying your first buy to let mortgage, you may need to establish a rapport with a lender in order to be in the position to do this.
The competition for buy to let properties usually occurs when landlords are buying property "off-plan", this is when a property is being built and flats, for example, are sold out of this building.
The answer to this is simple, nearly every lender has a buy to let offering. Which is the best for you? This is harder to say, much harder. There are probably as many different types of buy to let schemes as there are residential schemes in the UK.
Many high street lenders offer buy to let schemes, some are suitable for the first time buyer, others may only be suitable for the experience landlord. Some of the most competitive deals are only available through introducers/brokers. The reason for this is that buy to let lenders know that these introducers will present their cases to them in the manner in which they like. They allow the introducer to do what they perceive as difficult, ie selling the product or explaining how the buy to let mortgage process works. In this case the lender will take some administration and lend and not do much else.
Most people need a mortgage in order to purchase the property they are thinking of investing in. Some may be lucky enough to have the cash. Even those with cash may choose to purchase such a property through a mortgage, as this may have tax benefits to them.
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