Our Guide to ‘Buy to Let’ Mortgages

If you want to buy a property and rent it out rather than live in it yourself the chances are, you’ll need a mortgage. And it’s a specific type of mortgage that you’ll need, called a ‘buy to let’ mortgage. Here’s what you need to know about them.

The term Buy to let (BTL) refers to buying a property for investment purposes instead of your own personal use. In other words, you let it out to a tenant and receive an income through the rent received. Over time you should also see an increase in equity if the property increases in value.

Why purchase a buy to let property?

Over the years UK property, despite the odd market down-turn has proven to be a sound investment. A report from the Nationwide Building Society shows the cost of an average home in the UK was around £54,000 in 1991. Over 24 years house prices increased by almost 260 percent with the average house price in 2015 standing at £193,000. There certainly seems to be truth in the old saying “your money is safe in bricks and mortar!”

Many property investors like the fact that property is a very tangible asset that can be improved through modernisation and extension and a corresponding increase in value often results from undertaking this type of work.

Another great thing about owning a buy to let is that you can receive a monthly rental income from your property assuming it is tenanted.

Why do I need a buy to let mortgage?

A buy to let mortgage is a specific type of mortgage for purchasing investment property. It’s a loan that is secured against the house you are buying in the same way as a mortgage you would take out to buy your own home – which is called a residential mortgage. However, a buy to let mortgage differs a little in the way a bank decides whether it is affordable for you.

Which buy to let mortgage is right for me?

There are a whole host of different mortgage deals available when it comes to buy to let mortgages and you’ll see some great headline interest rates. But before you jump in and apply for one it’s important to understand what a lender’s criteria is. Every bank and building society will have their own unique set of criteria points and ideally you want to know whether you will be eligible for a mortgage with them before you apply. Otherwise you could spend a lot of time completing an application and having unnecessary credit checks only to be rejected and have to start the process again with another mortgage lender.

Seek professional advice

You may well be wondering how you can find out if you fit a mortgage lenders profile. Well, you’ve got two options really. Option one is to do a lot of web surfing to gather the information yourself and then speak to the specific lender you want to apply to and try to clarify that you’ll be eligible. Option two is to get professional advice from a buy to let mortgage adviser. With their expert knowledge of the market they’ll be able to guide you through the process and help you navigate any obstacles. They’ll also rule out any lenders that won’t be a good fit and recommend the best deal based on your individual circumstances. They’ll also submit your mortgage application on your behalf and be your single point of contact, keeping you updated on progress as your house purchase progresses.

Repayment or Interest Only?

With a repayment mortgage you pay back some of the initial loan with every monthly you make. This is the type of mortgage most people take out to buy their own home.

When it comes to buy to let mortgages most people go for interest only. This means the monthly payments will only cover the interest and at the end of your mortgage term you’ll still need to pay off the original debt. As property prices generally rise over the long run, buy to let investors will often sell the property at the end of the term and pay off the loan, keeping any profits realised from an increase in value.

By taking an interest only mortgage the monthly payments are significantly lower than with a repayment mortgage. This enables you to pocket any additional rent after you’ve paid your mortgage each month. In this way your buy to let can become an additional source of income for you.

What are the costs of buy to let?

  •  Purchasing costs

Just like buying your own home there are associated costs when you purchase a buy to let.

  • Deposit

You’ll need to put down a minimum of 20% deposit for a buy to let and the best interest rates are available when you put down at least a 25% deposit. This is considerably more than for a residential mortgage where you need as little as 5% deposit. So as you can see you will need a significant pot of money to get started in buy to let.

  • Lender fees 

Many but to let mortgage deals will come with a lender arrangement fee. These are more common than with residential mortgages and they are typically higher too.

  • Solicitor’s fees

You’ll need to pay for a solicitor to handle the legal side of your property purchase.

  • Stamp Duty Land Tax

You’ll need to pay stamp duty on the purchase price and if you already own your own home you’ll have to pay a higher rate of stamp duty as your buy to let will be considered an additional property. The governments stamp duty calculator can help you figure out how much you’ll need to pay.

Costs of owning the property

Here are some other costs of owning a buy to let.

  • Refurbishments

You may need to undertake a scheme of improvements in order to bring the property up to a lettable standard. This includes making it safe from a legal standpoint while also making it look attractive to prospective tenants.

  •  Mortgage payments

Each month you’ll need to keep up your mortgage payments. These should be comfortably covered by the rent you receive from the property.

  • Insurance

The bank will insist that you have buildings insurance and it is also a good idea to take out landlords insurance which can cover things like malicious damage to your property and legal expenses if you have disputes with your tenants.

  • Letting agents 

Many landlords prefer to employ the services of a letting agent. They can find a suitable tenant and handle interviews and reference checking. They can also manage your property on an ongoing basis arranging routine inspections and maintenance and repairs if you don’t want to handle these directly.

  • Property Maintenance 

You’ll need to pay for any repairs and maintenance on your property. This could be plumbing and heating emergencies, electrical issues or just upkeep due to general wear and tear.

  • Tax

Unfortunately, the tax man will want his cut of any profits you make from your buy to let property. You’ll need to pay income tax at basic or higher rate depending on your tax status. You may also be liable for capital gains tax if you realise a profit when you sell the property.

  • Tax Offsetting

It’s worth mentioning that there are ways to reduce the amount of tax you pay on your rental property by claiming tax relief for things like:

  1. The interest you pay on your mortgage
  2. Maintenance costs
  3. Buildings and contents insurance
  4. Letting agent fees
  5. Utility bills

There have been a lot of changes to the taxation of buy to let properties recently so it is vitally important to speak to an independent tax adviser to help you understand what tax you will need to pay and any pitfalls to be aware of.

Who can get a buy to let mortgage?

As mentioned earlier, every lender has a different set of criteria for assessing if you’re a safe bet. But ultimately, they want to know that you can afford it and will be able to maintain your mortgage payments. Among other things they will base their decision on the following: 

  • Rental income

First, a lender will look at how much rent you are likely to receive from the property. They want to see that the monthly rent will cover the monthly mortgage payment. But they’ll want even more reassurance than that. All lenders will then apply a stress test to get an idea of how well you can keep up your mortgage repayments in the future if interest rates were to rise. Generally, they want to see that the monthly rent you receive from the property will cover your mortgage repayment and a bit extra to give you a buffer. If you are a basic rate tax payer they will usually want to see the rent cover 125% of the mortgage payment. If you are a higher rate tax payer this rises to 145%. They’ll also base this calculation on an assumed future interest rate of 5.5 percent.

  • Credit rating 

Your ability to manage your credit commitments will play an important part of the decision making process. If you’ve had late loan payments, defaults or any other blips on your credit report it could affect how much you can borrow.

  • Income

The majority of buy to let lenders will want to see that you have some form of income aside from rental property income. This gives them reassurance that you will be able to keep up your mortgage commitments should you experience periods where the property is untenanted. Many will want you to earn a minimum of £25,000 per year. Others won’t stipulate, as long as they can see that you earn an income.

  • Size of deposit

A bigger deposit equals a lower loan to value. This is important, as the less a bank is lending you as a percentage of the property price the more comfortable they will feel, as it represents less risk for them. This may also mean you get a better interest rate.

  • Potential buy to let problems

Although the UK property market has historically performed very well as an investment vehicle nothing is guaranteed and you could lose money investing in buy to let.

  • Empty property

There may be periods when your property is untenanted. If this is the case you won’t be making any money out of your buy to let but you’ll still need to keep up your mortgage payments and any insurance premiums.

  • Property repairs

Over time things will need replacing as they wear out. Replacing big items like cookers and boilers can represent a significant outlay that will put a dent in your profits.

  • Problem Tenants 

There’s always a possibility you could get a bad tenant who may damage your property, steals fixtures and fittings or refuse to pay their rent. If this happens you could find yourself out of pocket unless you have adequate landlord insurance in place.

  • Interest rates rises

If mortgage rates go North it could increase your monthly mortgage payments unless you have a fixed rate deal. Again, this would see your profits diminish.

  • House price crash 

If property prices go down your buy to let may be worth less than what you paid for it. If you need to sell it you could find yourself in negative equity. If you took out a mortgage to buy it and the property is worth less than the loan you may need to find additional money to repay the original debt. While this is unlikely due to lenders not going below 80% LTV it something that needs to be considered as a worst case scenario.

Is buy to let right for you?

As with any investment, careful consideration is needed before you purchase a buy to let. Even more so perhaps than with other investments because you are providing a home for somebody and you need to ensure that you are providing an adequate standard of accommodation and that you are complying with the law. You also need to be aware of the tax obligations of owning a buy to let and I strongly recommend you get advice from an independent tax adviser and a solicitor before jumping in.

Next steps…

Hopefully, this has proven a useful guide on buy to let, but if you’re thinking of getting started in investment property, we’d be only too happy to help. We’re bonkers about mortgages and helping our clients successfully purchase property really floats our boat! To find out for yourself give us a call on 01332 416470 or email us at hello@hollybeckfinance.co.uk.

We’re Recruiting!

Mortgage and Insurance Administrator

We are looking for a forward-thinking individual to support our advisers in offering a first-class, professional, service to our clients.

Minimum of 16 hours with the option of overtime and the potential to increase to a full time position.

Mortgage administration experience preferred, but we will offer full training and support.

The successful applicant will need to:

  • Have a positive attitude
  • Be a team player
  • Have great communication skills
  • Be pro-active
  • Have good IT skills
  • Be organised

Key responsibilities include:

  • Liaising with lenders, insurers and solicitors
  • Assessment of key compliance documentation
  • Communicating by telephone and email
  • Submitting full mortgage and insurance applications and supporting documents
  • Keeping our clients smiling throughout the process!

Please forward your CV to hello@hollybeckfinance.co.uk  by Friday 10th May. Good luck!

 

Retirement Interest Only Mortgage (RIO)

Retirement Mortgages are back – and it’s not ‘equity release’

Wind the clock back a few years and the only way to enjoy any of the money tied up in your home was to apply for an ‘equity release’ mortgage.

Equity release mortgages can be expensive to arrange; with high set up costs and high interest rates charged. In some instances, the interest is ‘rolled up’ over time – leaving borrowers concerned about what equity might be left when their home needs to be sold, or when they die and want to pass it on to their loved ones.

Many people decided that selling and downsizing was a better option; offering more certainty over the numbers. Or….simply doing nothing at all.

Enter, the ‘Retirement Interest Only’ mortgage (RIO).

Can I benefit from it?

  • Yes, if you need to remortgage from a standard interest only mortgage, with your house sale as the repayment vehicle
  • Yes, if you want to release equity to make home improvements or enhance your retirement lifestyle.

How does it work?

  • Affordability

If you are retired and want to release equity from your home, you simply apply under the same basis as if you are working and need a mortgage. The mortgage is granted on your ability to repay the monthly payments, so is assessed using your retirement income.

  • Interest Only

A major benefit is that the mortgage is granted on an ‘interest only’ basis, which keeps the monthly payments lower. This also means that the amount borrowed doesn’t decrease, nor does it increase.

  • No set end date

Unlike a traditional mortgage, which is repaid after a specific term, the RIO mortgage is repaid if you move into sheltered accommodation, residential care, move home or when you pass away.

As long as you can service your interest only payments during the term of your mortgage, you won’t be asked to repay it until one of the above life events happens.

Key things to consider

There are terms and conditions that have to be met with a RIO mortgage, along with the lenders usual criteria:

  1. Many lenders will restrict the loan around 40% – 50% of the property value
  2. Minimum age at application of 55
  3. The property must be your residential home

 Is it for me?

If you have little in the way of savings and want to release money to give you a better retirement lifestyle then this could be a way of doing that. The money can be used for a variety of reasons; whether it’s a holiday of a lifetime or changes at home to make life more comfortable.

How do I find out more?

We don’t charge anything for an initial meeting to discuss your requirements and find out what your options are. We’ll go through your personal and financial circumstances to find out if you meet the eligibility requirements and then take things from there.

For more information please contact the team on 01332 416470 or email hello@hollybeckfinance.co.uk

 

 

 

 

The true value of a stay-at-home parent

 

With Mother’s Day over for another year, we explore the financial value of the stay at home parent.

As a Mum of two gorgeous kiddies, personally I think that being a mum is the most rewarding job in the world.

But wouldn’t it be great if we actually got paid for it as well?

If you think about it, a stay-at-home parent – be it full-time or part-time, is many things: childminder, teacher, nurse, cook, cleaner, launderette, taxi service, gardener, dog walker, accountant, counsellor, personal shopper, you may care for an elderly relative as well……….the list goes on and on.

If you’re a stay-at-home mum or dad, do you know your worth, not just emotionally but financially?

Your average workday might look something like this:

  • 3.5 hours cleaning, tidying and washing up
  • 2 hours preparing and cooking food
  • 1-hour cleaning, hanging up and ironing clothes
  • 1-hour personal shopper
  • 30 mins gardening
  • 30 mins taxi service (to and from school)
  • 30 mins helping the kids with homework
  • On call for the kids 24 hours a day, (7 days a week!)

Have you ever wondered what your salary might be if you were paid for all the hours you put in at home?

We want to highlight just how hard us mums work.

Some reports suggest that if we were financially rewarded for the job of being a mother, we would be earning £80,000 a year. Whichever figures you believe, the importance and value of a stay-at-home parent is very clear.

It’s an awful thing to think about but with such a busy life have you ever stopped to think about how your loved ones would cope financially if you were to die? Many Mums think they don’t need life insurance or other forms of protection because they don’t work – look at the list above…..we certainly do work, incredibly hard!

The value of a mum is sometimes overlooked when families try to work out their life insurance needs.

If you’re a stay-at-home parent and do not earn a salary, it’s easy to think that you don’t need life insurance cover.

You might think that life insurance is just to protect against the loss of the breadwinner, whether that be mum or dad.

After all, they provide the funds to pay the mortgage or rent, household bills and living costs each month. Right?

WRONG.

A stay-at-home parent makes a massive, often underestimated contribution and we, at Hollybeck, believe they should be protected too.

Any family would be severely impacted, both practically and financially if they were no longer around.

In the event of your death or a serious illness, who would step in and help support your family and run the home?

Could you rely on grandparents? Are they young enough to effectively care for your children?

If not, could you afford full-time childcare, a cleaner, transport costs?

Or would your spouse need to cut down on their work hours to help fulfil these roles?

If so, how would this impact on their salary, on which everyone relies financially?

According to research from The Money Charity[5], the average cost of raising a child, from birth until the age of 21, is £30.23 a day.

That’s £11,034 a year, or a mind-boggling £231,713 over 21 years, (per child).

Of course, replacing a parent is impossible, but a pay-out from life insurance could help to cover some of your family’s day-to-day costs and take some of the emotional, practical and financial stress out of a terrible situation.

For more information and guidance on how much cover you need, please contact us for a chat today. We’re a friendly bunch and will only recommend a policy that is right for you. Our team can be reached on 01332 416470 or hello@hollybeckfinance.co.uk

Love Yourself This Valentine’s!

February 14th is Valentine’s Day. Hurrah for love!

Rather than worrying about how you are going to get out of the house after the mountain of cards arrive, why don’t you ask yourself a question?

When was the last time you did something to love yourself?

That could mean getting up a little earlier to fit in some exercise, eating healthier, drinking more water, doing some peaceful meditation or going to get a general health check-up.

Most of the time you only get your blood pressure, cholesterol, blood sugar or BMI (height to weight ratio) checked if you have gone to the doctors for something specific…. Maybe you’ve never had need to go at all, so don’t know how your health stands. But did you know there are other options available for you to get a general health check-up? This could be at your local GP surgery, a pharmacy or your local gym might even have the option. It doesn’t have to cost the earth either.

If you do this regularly you can find out if there are any signs to show that these readings are heading in the wrong direction and put some actions into place to correct it, before it gets out of control.  Once these levels get to the point where you need medical intervention, they often carry a number of other health risks, which is why it is so important to keep a check on them.  We’re all so busy with work and family that we often put our own health to the bottom of the priority list!

Insurance companies now look at ways to encourage their policy holders to be healthier and some will even reward you with up front discounts on your premiums. With discounts on other products and services, if you are doing what you can to be active and engage in your health you’ll be rewarded.

What if I already have high blood pressure/ high cholesterol/ high BMI/ high blood sugar levels?

Don’t worry. This doesn’t necessary mean that you can’t get insurance. The insurance companies look at each application on an individual basis and if they can see that you have this under control they will often still look to offer you insurance. There might be some terms attached to the cover, but by getting independent advice you can make sure that you are going to the insurance company that will offer you the best terms of cover for your own circumstances. But remember to answer the medical questions honestly on your insurance application to make sure that you are fully covered if you ever need to make a claim. Talk to your adviser if you have concerns and they can give you the best advice.

So, remember this Valentine’s Day to show yourself some love!