Buy to Let Mortgage Guide
1 - A brief history....
Making profit as a private landlord prior to 1988 was a very difficult proposition and very hard work. The tenants were very much in favour when it came down to eviction laws and they had long security of tenure and rent controls making it very hard for rent to be increased.
In 1988 changes in the Housing Act helped create the first ‘Short hold Tenancy Agreement’ and loosened the regulation surrounding this sector of the market. With landlords obtaining more power to now evict troublesome and/or non paying tenants, it became more attractive to become a landlord and enter the buy to let arena.
Then not long after this innovative change in law, came the recession and housing crash and between 1989 and 1994 the demand for rentals greatly increased.
The Housing Act 1996 implemented further changes to the law, which made it impossible to inadvertently create a sitting tenancy. Again this added to the attractiveness of becoming a landlord and investing in 1996 also saw six lenders introducing mortgage products aimed specifically at the buy to let property investment. Previously it was only by means of a commercial loan with higher rates on interest that you could raise funds to purchase for buy to let purposes.
The interest rates were closer in line with that of the residential mortgage market and rental income was taken into account within the underwriting of the application.
Buy to Let mortgages were in huge demand. The market grew from £3.1 billion gross lending in 1999 (when the Council of Mortgage lenders began records) to a whopping £44.6 billion in 2007!
It has since dropped back to levels seen in 2001. 2009 saw £8.5 billion gross lending, so even in these tough climates it is a market that continues to progress at a reasonable rate.
2 - What went wrong?....
We have seen (as in all sectors) a greater increase in repossessions and some lenders have withdrawn from the market where as other lenders have tightened their criteria. An example of this is one lender restricting the amount of buy to let properties they allow any given landlord to have with them as part of your portfolio.
Problems started to arise when basic fundamentals were neglected. Fitness of the property and market, conditions were not properly investigated by the investor. At one time every man and his dog wanted to achieve a buy to let investment and viewed this as a ‘safe bet’. The market place made purchasing a buy to let investment pretty achievable to the amateur landlord whom had no experience in the market previously.
An influx in buy to let purchases in flats and apartments which over saturated the demand made a lot of these investments vacant for some time. Drops in property values made some of these un-rentable homes unsellable because it fell into negative equity (i.e the property is worth less than the mortgage debt).
When things become tight at home, your residential mortgage is obviously the one that takes precedence and in times of void rental periods maybe the buy to let mortgage is the one that goes unpaid.
Markets came tumbling down, with a massive oversupply of the wrong types of property for tenant demand in the wrong area. Mortgages were unpaid, and lenders lost vast amounts of money.
When the rest of the money markets dried up as government support only reached the banks, specialised lenders that previously serviced the buy to let market ceased to trade.
3 - More recently….
More positive signs over the past 18 months have seen lenders re-entering the market place and previous lenders returning.
The amazing capital gains of recent years may not be achievable in the foreseeable future, but there are still returns to be made from the rental income.
I believe rental demands will continue to increase. This is for many reasons including the lenders making it harder for people to borrow, first time buyers not being able to save large enough deposits that are required, or people just not willing to commit to a purchase and having a preference to rent.
Speak to longer term landlords whom were not in the market for a quick buck and have researched the market place before their purchase, and most will tell you that they have achieved successful results from their investments and they see the property as a long term investment.
The ‘buy to let’ investors I speak to who seem to be the most successful, are the landlords whom have invested in multi-room lets (HMO’s). This is not a purchase for the faint hearted and an area of the buy to let market which has been under the spotlight of late with some people requesting for tighter scrutiny required to protect the tenant.
There are already provisions that need to be in place with some HMO’s such as the need for a license from the local council if you are renting 5 rooms or more in the one house. A three story property requires certain emergency lighting and fire alarms in place. This being said, the hard work certainly seems to pay off for the landlords that do invest time and effort to get this type of property in order and can be very rewarding.
This is not to say a normal ‘buy to let’ purchase with a single tenancy agreement is any less attractive. It comes down to researching the right property in the right circumstances for you and for the potential tenant demand.
4 - What is the criteria for a buy to let purchase?.....
Criteria for purchasing a buy to let property at present (be it a HMO or not), typically consist of the following. You need a minimum 20% deposit for a Buy to Let Purchase, but generally 25% will achieve you a slightly better rate and certainly lower the added arrangements fees that the lender charges.
The rental income will need to be 125% of the mortgage payment (interest only). This means if the interest only mortgage payment is £500 per month, the anticipated rental income you will receive will need to be no less than £625 per month.
You will generally need to have at least a residential mortgage in place already, but if not then you will need to prove personal income.
5 - How do I choose the right property?.....
There are lots of factors to take into account when looking at which buy to let mortgage product best suits your needs so speaking to an independent adviser is essential.
When choosing the right property it is also important not to view the purchase as a home you will live in, but look at it purely from an investment perspective.
- What type of tenant are you looking for?
- What existing rental properties are in the area and what rents are being achieved?
- What distance am I from local amenities?
- What is a prospective tenant looking to achieve from a property in this area?
- Do I furnish or leave it unfurnished, and what are the pro’s and con’s of each option?
- Do I use a letting agent or manage the property myself?
- What fees are applicable, and what are the tax implications?
All these issues are things an adviser will have discussed previously and probably even experienced themselves, so its advice that should be sought after and well respected. You will learn from their mistakes and the mistakes of their clients, so you can hopefully benefit from not repeating any of those errors and try to avoid any potential problems that the buy to let purchase can create.
If all these steps are followed you should have taken all the necessary measures to hopefully make a very intelligent purchase and a successful long term investment. Perhaps even the start of your portfolio of successful purchases.
For more information please contact an adviser at right-advice on 01908 31 49 49
or contact us via our online form.
6 - Existing or first time landlords
Buy to let continues to prove an attractive proposition to both existing landlords and people wishing to enter this exciting sector for the first time. With so many property owners having considerable equity in their main homes and in particular worried about whether their children will reach the first step on the property ladder, or worried that traditional pension methods are not rewarding as they should, more and more people are investing in buy to let.
To find out if you could take out a buy to let mortgage you don't need to speak to a specialist buy to let mortgage broker. Right-Advice have access to the best buy to let deals on the market and can assist with any other queries you may have in this sector.
7 - What are the hidden costs
You will need to have a contingency fund to cover you for periods of time when there are no tenants in the property. A prudent step would be to ensure about three months' rental income so that you are able to meet the costs of your mortgage repayments.
A letting agent's fee will need to be paid from the gross rental income. Milton Keynes Letting agents tend to charge in the region of 10 -15 per cent depending on the level of service you want. In fact most letting agents in the south east region charge these amounts typically. It would be wise to use one if you are a first time landlord and have no experience of letting a property.
Don’t forget, not only will the rent need to cover your monthly mortgage repayments, but it will need to be enough for you to cover the costs of buildings insurance (possibly contents insurance if you are furnishing the property or want items such as carpets covered), maintenance and redecoration, plus possible void periods when the property is empty or vacant. It is also possible to take out insurance against non-payment of rent, and to cover legal expenses. You will also need to cover ground rent and possible service charge if the property is leasehold, and any service charges if these are applicable. As a landlord, these are all your responsibility.
Your tenants will be responsible for paying Council Tax and utility bills, TV licences, telephone bills and internet connection costs, for instance.
8 - Buy to Let mortgage in Milton Keynes; (investing in Milton Keynes)
A buy-to-let property should be viewed as a long-term investment and not something you undertake with a short-term view. Use the Right-Advice Buy to let guide to obtain more advice and allow us to assist you in finding the best buy to let mortgage deals in the UK from independent brokers including information for first time buyers.
The UK buy-to-let mortgage market is always present because of the need for rented properties.
Milton Keynes is especially attractive because of its geographic location 50 miles in between Birmingham and London, with great transport infrastructure. One of the reasons many company head offices are locating here creating more jobs and in turn more people requiring accommodation.
In recent times it has been said that MK is the fastest growing city in Europe and when you consider its size and increase in population over the short 30-40 year history that statement would not be hard to believe.
Many mortgage lenders offer specifically designed buy-to-let mortgages at very competitive rates. If you are a first time buyer with no proven record of paying a mortgage, the lender will make more rigorous checks to ensure that you can afford to meet the repayments, and may impose age restrictions as well as specifying a minimum income.
Lenders may consider that they are taking more of a chance with a buy-to-let mortgage, so you may be expected to find a larger deposit than if you were taking out a residential mortgage. The minimum will be 20-25 per cent, depending on your circumstances and possibly the type of property you are looking at. So, in order to buy an investment property costing £80,000, you would need to put down a deposit of at least £12,000. In addition, the lender may also charge slightly higher interest rates and arrangement fees for a buy to let mortgage.
Each mortgage lender will have a method in place to calculate the amount you can borrow. The rent you will be paid must usually be around 130 per cent of your monthly mortgage repayments. So, for example, if your monthly mortgage repayment is £1,000, your tenant should be paying you rent of a minimum of £1,300. The lender will also want to be assured that the property you are proposing to buy is a good long-term investment. You also need to think about whether you could afford repayments if there is a rise in interest rates. Most buy-to-let investors choose interest-only mortgages on two to three year fixed rate deals: however, it is essential to seek specialist mortgage advice from an independent buy to let mortgage advisor first. Right-Advice advisers specialise in the sector and are readily available to assist with your queries.
With an interest-only buy-to-let mortgage you make greater income tax savings, as mortgage interest attracts tax relief on buy-to-lets, but at the end of the term you may still have the entire mortgage loan outstanding. Although there is a great deal of buy-to-let mortgage information around in magazines and online, we recommend you seek buy-to-let mortgage advice from a mortgage broker With an interest only buy-to-let mortgage you make greater income tax savings but at the end of the term you may still have the mortgage loan outstanding. However, you should always seek proper financial advice to ensure that the method of repayment is appropriate for your circumstances.
A buy-to-let property should be viewed as a long-term investment and not something you undertake with a short-term view. Most experts believe you should be looking at a 10 - 15 year term to see a reasonable return on investment. With the right market conditions, you could see a return on your capital in the short term but there is always the possibility that house prices may fall. Don't forget that you will also have to pay Capital Gains Tax when you sell a buy-to-let, as it will not be your principal private residence.
9 - The Tax Situation for Buy to Let
If you take out an interest-only mortgage on your buy to let property, the mortgage repayments are tax deductible - another reason why this type of mortgage is the one most common in this area. Tax deductible means an expense that is subtracted from your gross income from the property, so that the amount of your income that is liable to tax is reduced.
You are also eligible for tax relief on: rental insurance; property maintenance; letting agency fees; the costs of any professional advice sought after you've bought the property; and, if applicable, ground rent and service charges. Also, 10 per cent of the annual rental income is offset to cover the depreciation in the value of furnishings, sofas, carpets, and so on (but not fittings such as a fitted kitchen or bathroom suite), cleaning, insurance policies on plumbing cover, white goods and gas boilers, accountants' fees, letting agents' fees and advertising. A tax advisor can help you complete your tax return form.
You will, however, have to pay tax on your rental income. You will also be charged Capital Gains Tax when you sell the property, at the highest rate of income tax, unless you can demonstrate that it is your primary residence. To do this, you may need to have been resident there for a certain period of time. Capital Gains Tax is applied to the increase in value of the property at a flat rate of 18%. The new rules do away with taper relief, although CGT remains payable however long you own the property. So, for example, if you buy a flat for £100,000 and sell it for £150,000, your gain would be £50,000 and you would be taxed on this. We recommend you seek good tax advice from an independent financial tax adviser or accountant.
10 - Your responsibilities as a Buy to Let Landlord
As a landlord, you will be required to ensure that the property complies with fire regulations such as installing smoke detectors, ideally on all floors, and possibly fire doors. You should install a fire extinguisher and fire blanket in the kitchen. To find out further information about fire regulations and other regulations that may apply, contact the local authority.
It is the responsibility of the landlord to ensure that the buy to let property is 'fit for habitation'. As well as generally maintaining the property and arranging for any repairs to be done, you must ensure that the property is free from damp and has good ventilation, drainage and sewerage systems.
You are responsible for ensuring that there is adequate water and heating and that the equipment is in good working order. Toilets, basins, baths, sinks and drainage must be well maintained. If you do not meet the criteria and the property puts your tenant's health at risk he may be able to take legal action. This is another reason for using a well-established letting agent: they will not take any property onto their books which does not meet current criteria, and they will advise of any work needing to be carried out beforehand.
As a landlord, you will be required to ensure that the property complies with fire regulations such as installing smoke detectors, ideally on all floors, and possibly fire doors. You should install a fire extinguisher and fire blanket in the kitchen. To find out further information about fire regulations and other regulations that may apply, contact the local authority.
Ensure that any furniture and furnishing that you provide if you are letting the property as furnished accommodation, complies with the Furniture and Furnishing Regulations. Be particularly wary if you buy or are given second-hand furniture. It must meet the 'match test' that now forms part of the Fire Safety Regulations.
If the property has gas installed or gas appliances, they must be checked annually by someone who is registered with the Council for Registered Gas Installers (CORGI). You must keep a record of the checks and show them to your tenant within 28 days of the inspection. If your tenant owns gas appliances of his own, he is responsible for maintaining them.
Any electrical equipment that you supply with the let, from immersion heaters to kettles, must be in good repair and safe to use. You should arrange PAT testing (Portable Appliance Testing) and make available instruction booklets with any new electrical equipment that you supply.
Deposits must now be protected by law in one of three government-approved schemes
11- Tenancy Deposit Schemes
All tenants' deposits must now be protected and landlords taking deposits must sign up to a government-approved scheme. One scheme is custodial-based, while the other is insurance-based. With the custodial scheme, you must hand over the entire deposit to an interest-bearing fund administered by The Deposit Protection Service; with the insurance-based scheme, you hang on to the deposit yourself but must protect it by taking out annually renewable insurance.
12 - For more information
For more information please contact an adviser at right-advice on 01908 31 49 49
or contact us via our online form.