If you want to invest in property via buy-to-let, you will need to secure finance, research your area and discover what you need to know to become a landlord, particularly new tax rules. Joanne Atkin looks at some of the things you should consider
Just under one in five mortgages are taken out for the purpose of buying a property to rent to tenants – this is known as buy-to-let.
The growth in buy-to-let is on an upward path. In the first quarter of this year, 17.3 per cent of total mortgage advances were for buy-to-let lending compared to a low of 5.5 per cent during the depths of recession in the third quarter of 2009.
There are all sorts of reasons for investing in property – some people want a steady monthly income and others may see it as part of their future retirement planning. Whatever the reason it is important that you go into with your eyes open as there are rules and regulations to consider as well as the finance of the property.
To start with, in order to secure a buy-to-let mortgage you must have a deposit of at least 25 per cent, although there are a handful of lenders that will consider a 15 per cent down payment.
There are 32 lenders who operate in the buy-to-let sector and they range from high street banks and building societies to specialist providers. Between them they currently offer around 860 buy-to-let products catering for a wide range of situations. There have been at least four new entrants in the past few months in the buy-to-let space and it is quite likely that more new lenders will come on board.
Some will lend to first-time landlords, others will only lend to professional investors and most will insist that you have an income. Other variations may include lending on ex-local authority houses, flats above commercial premises and houses in multiple occupation (HMOs are where three or more people who are unrelated live and share facilities such as the kitchen and bathroom). There are even a couple of lenders now who will lend if you have had past credit problems – as long as they have been rectified.
If you want to renovate a property you will need development finance first and after the work has been carried out you may then be eligible for a buy-to-let mortgage.
With so many options your best bet for financial advice is to visit a mortgage broker and there are specialist buy-to-let intermediaries who are particularly experienced if your situation is not straightforward.
Age limits
Some lenders will lend to people who at the end of the loan will be 85 years old; and The Mortgage Works, part of Nationwide will even go above that.
Bob Young, CEO of Fleet Mortgages, whose products are tailored towards experienced landlords and property investors, commented: “We recognise that people are living longer, that landlords want to hold their properties longer into retirement plus there is a growing appetite amongst people over 50 wanting to invest in property.”
Fleet Mortgages launched in November last year and close to half of all its applications are from borrowers over 50.
Young said: “We suspect that with the newly-introduced pension freedoms there will be a small, but perhaps growing, number of retirees who wish to use money from their pension pot to purchase a buy-to-let investment.”
Costs
When applying for a buy-to-let mortgages the lender will assess you on the rent you are charging, which is usually 125 per cent of the mortgage payment – known as the rental yield. For example, if your monthly mortgage payment is £1,000, the rent you charge must be at least £1,250.
But there are other costs to consider, such as maintenance and repair costs. Can you cover the mortgage if the property sits empty for a couple of months or your tenant can’t pay? New lender Foundation Home Loans stipulates that first-time landlords must be able to show savings equivalent to six months’ worth of mortgage payments. This is a sensible move that new buy-to-let borrowers should consider anyway.
Hans Geberbauer, chief executive officer of Foundation Home Loans, explains: “When we looked back at our data we saw a higher likelihood of a probability of default for first-time landlords, so it’s a slightly riskier proposition. We want to make sure they are aware of the risks and their responsibility as a landlord.”
If you decide to take out a tracker mortgage that tracks the Bank of England Base Rate, bear in mind that when it goes up, so will your monthly mortgage repayment. Governor of the Bank of England Mark Carney has indicated Bank Rate will go up early next year, although it will be gradual rises of probably 0.25 per cent at a time.
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Buy-to-let products
In early August Principality Building Society reduced the majority of rates across its buy-to-let mortgage range. The lowest-priced deal at the time was its 60 per cent loan-to-value (LTV) discounted variable rate mortgage at 2.10 per cent to 31 October 2017. It also has a low fee of £99, as well as an incentive package of free valuation for all borrowers and free legal fees for remortgages.
Santander had a two-year fix at 2.85 per cent on 75 per cent LTV with an arrangement fee of £1,995.
Foundation Home Loans, a new buy-to-let lender that launched in February, has a two-year fix at 3.25 per cent up to 75 per cent LTV and the arrangement fee is 1 per cent of the loan.
Specialist lender Precise Mortgages has a lifetime buy-to-let tracker at 3.85 per cent for loans up to 70 per cent LTV and the arrangement fee is 2 per cent of the loan.
Bear in mind that more often than not, products with the lower interest rates come with higher fees. A mortgage broker will be able to work out for you what your best options will be.
Please note these products were available at the time of going to press on 5 August 2015. They may no longer be on the market, products can be pulled at short notice
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Buy-to-let and tax
Investing in property is regarded as a business and subject both to capital gains tax and tax on rental income, although there are allowable deductions for costs, which can include include lettings agent fees, insurance, maintenance and repairs costs, as well as council tax and any ground rent.
On the horizon are changes to tax relief. In the July Budget, the Chancellor George Osborne announced that tax relief for individual buy-to-let landlords will be restricted to the 20 per cent basic rate of tax – from 40 to 45 per cent at the moment. This will be phased in from 6 April 2017 until relief is completely restricted to the basic rate by 2020/21. The Treasury projects this measure will raise £665 million by 2020/21.
Jonathan Samuels, CEO of specialist lender Dragonfly Property Finance, said the move may make prospective landlords weigh up the pros and cons more closely before entering the market.
He comments: “There are concerns that landlords will simply bump up rents to cover the hit. This may well happen in some cases but market forces and the rents people are prepared to pay are likely to offer a degree of resistance.”
If you’re planning on buying a property, consider how much your costs will rise, suggests Phil Nicklin, real estate partner at Deloitte.
On the tax relief changes, Nicklin notes: “This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit.”
Limited company status
One way around this is for landlords to obtain a buy-to-let mortgage as a limited company – rather than as an individual – as any interest payment would be regarded as a business expense and therefore qualify for tax relief.
However, landlords choosing to mortgage through a limited company pay a premium compared to the buy-to-let mortgage market average. The overall average cost of a mortgage product for a limited company stood at 5.4 per cent at the start of July, whereas the average annual rate for the entire buy-to-let mortgage market was 4.6 per cent – a difference of 0.8 percentage points, according to the Buy-to-Let Mortgage Costs Index from Mortgages for Business. In July 2015 there were 122 buy-to-let mortgage products available for limited companies.
David Whittaker, managing director at Mortgages for Business, comments: “Mortgages which allow limited companies to be borrowers comprise 13 per cent of all products on the buy-to-let market. It means that a good number of landlords and investors will have the opportunity to outfox the Summer Budget by taking advantage of the tax benefits associated with registering as a limited company.”
However, he warns that limited company mortgage products may not be for everyone: “Registering as a limited company takes time, money and can be quite complex. The average interest rate for limited company mortgages is also greater than the average rates available in the wider market.
“And, for once, prospective tax changes will work in favour of investors as the rate of corporation tax is due to fall from 20 per cent to 19 per cent from April 2017 and to 18 per cent from April 2020 – which, if profits are to be retained within the company, would represent a significant tax saving for a higher rate tax payer.”
Be aware
There is much choice within the buy-to-let sector in terms of type of property and mortgage. Just over a third of landlords (37 per cent) use mortgage finance to fund properties, which goes to show that the majority of the private rented sector is in the hands of larger companies – but there is a place for the smaller landlord.
Just make sure you are aware of everything, especially as the law is always changing. For example, from 1 October 2015, you must ensure there is a smoke alarm on each storey of living accommodation, and a carbon monoxide alarm where there is a solid fuel burning appliance.
Other landlord essentials include getting an Energy Performance Certificate (EPC), an annual gas safety certificate and all furnishing must comply with safety law.
It is also wise to research the area you are buying in to see what sort of properties are for sale, what the demand for rented accommodation is like and how much rent you are likely to get to ensure you can cover all your costs.
You must then find your tenant/s, get references from them, secure their deposit with one of four government approved Tenancy Deposit Protection schemes, provide a tenancy agreement and take an inventory of the contents of your property.
A good book to read is Successful Property Letting – How to Make Money in Buy-to-let by David Lawrenson, a professional landlord, buy-to-let expert and property consultant. His website www.lettingfocus.com is also a good source of information.
There are also professional landlord associations such as the National Landlord Association, plus there are landlord and lettings exhibitions on throughout the country at various times during the year, which you may find useful.
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Case study: Getting onto the property investment ladder
Steven McCrudden has taken his first steps into the buy-to-let (BTL) market and hopes to build up a small portfolio.
He has been developing properties in the Portsmouth/Southsea area for the past few years and sees buy-to-let as the next step.
Four years ago Steven was made redundant which gave him the opportunity to start developing properties as a side line.
Steven says: “I had originally come from an architecture background and my father was a builder so it was always something I wanted to do but lack of capital had held me back up to that point.
“After a couple of years and a few properties down the line I was able to go part-time to concentrate more on the developing and then start up my own business (SOM Property Services) at the start of last year.
“However, I have found that with the property market the way it is and the increase in programmes such as ‘Homes under the Hammer’, I started seeing many properties selling for far more than you would expect considering their condition, with the knock on effect meaning it was a lot harder to purchase at the right price to make an acceptable profit after renovation.
“I therefore started to look into the rental market and had originally wanted to buy an HMO (houses in multiple occupation) property to rent to either the student or the professionals market.”
First-time landlord
But Steven found that because he was a first-time landlord, nearly all lenders refused to offer him an HMO mortgage, unless the interest rate was high.
So instead he found a two-bedroom property in a highly rentable area, in good condition with a C3/C4 mixed use licence. This means the house has planning permission to change its letting situation from a residential dwelling to an HMO. So Steven applied for a two-year BTL mortgage and when this lapses, he can remortgage to an HMO mortgage then rent the property as a three-bedroom or renovate to increase it to four or five bedroom house.
Steven took out a two-year fixed rate mortgage with TSB for £165,000 and after smartening the place up had tenants in after two weeks paying rent of £825 per month.
He says: “I had considerably built up my capital the last few years and had enough funds to purchase this property and then look to purchase another two in the following year.
“In the first instance I used a local estate agent for the tenant find as I thought due to my inexperience this would be the safest option while managing the property myself.
“I am fully aware of what requirements I need to have in place (gas safe, tenancy deposit, etc) due mainly to me researching extensively, something I would advise to anyone thinking of purchasing a BTL.”
Local area
Steven has lived in the area for a decade and owns his home with fiancée Sarah who is supportive of his move into BTL.
“Sarah has been brilliant,” says Steven. “Although I was taking a big risk in getting into, firstly the development field and then into the lettings market, she has backed me throughout and trusts me to get on and do what she knows I can do well. We live locally which means the management of the BTL and any subsequent properties will be easier to keep on top of while hopefully being viewed as a very good landlord. This is something which is extremely important to me after viewing several run down houses over the years, run by out of the area landlords owning multiple properties and giving the rest of us a bad name.”
Mortgage
“My experience with TSB, advised to me by London & Country, was very good,” says Steven. “It was maybe a slightly higher rate than I could have got elsewhere but the speed in which the mortgage was offered made picking them a correct decision and I would use them again – as long as the rate was still acceptable.”
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