Why is it so popular?
Buy-to-let gives investors the chance to make money in two ways. First, from the rise in property values and second, from the rent paid. Returns from property investment have proved exceptional over the last few years compared with conventional savings and investments, which has encouraged investors into the rental market. Also mortgages are easier to find and deposits that lender require are getting smaller which is all helping to fuel interest in buy-to-let.
There is also a healthy supply of tenants, as many would-be first-time buyers donÂ’t earn enough to buy and a growing number of people are happy to rent rather. In a recent survey by mortgage lender GMAC RFC, 68 per cent of 18-34 year olds prefer to rent because it allows them to live in fashionable areas close to their friends rather than commit themselves to a mortgage.
How do you get a mortgage?
The buy-to-let market is very competitive with over 200 products available. Loans are usually offered between 75 per cent and 85 per cent loan to value (LTV). The rates charged tend to be higher than on standard mortgages and you can expect to pay around 5.50 per cent for a variable rate mortgage. Fixed, capped, tracker and discount mortgages are also available, but again, expect to pay more than with a standard mortgage.
Arrangement fees may be higher than on standard mortgages, so bear this in mind when working out your finances.
Lenders will want to make sure that the property chosen is suitable and that the rental income will cover the mortgage repayments. Most lenders will want the rent to cover the mortgage with another 25 to 50 per cent margin on top. The extra funds will give the cash to pay for repairs and to fill ‘void’ periods – gaps between tenants.
Is property a good investment?
Returns from savings and investments have been low in recent years which has prompted people to look for other ways of making money in the mid to long term. And property has come up trumps. But it is unlikely that property investors will see such spectacular returns in the future and that will mean an end to get-rich quick investors. However property does still represent a sound investment as part of an investment portfolio.
And it appears that investors are taking a healthy view of buy-to-let. Research by mortgage broker John Charcol found that almost all investors intend to keep their investment properties should house prices fall and nearly two-thirds of investors say they are in the market for at least 10 years, with a third expecting to keep them for over 20 years.
Ray Boulger, technical manager at John Charcol says: “The buy-to-let market is built on much firmer ground than recent warnings have suggested. Far from being propped up by legions of cautious first-time landlords, the market is dominated by professional investors who take a long-term view of the portfolio of property investments.”
And as from next April investors will be able to include residential property within a self-invested personal pension (SIPP). Property can be purchased and set against income tax, which means that a 40 per cent taxpayer will effectively only pay £120,000 for a £200,000 property. Lower-rate taxpayers will pay £156,000. If the property is let out, the rental income received will be free of income tax and, when the property is sold, it will be free of capital gains tax.
Looking for property
The Association of Residential Letting Agents gives the following advice on finding a property:
• Use an experienced letting agent who can advise on location and property type
• Think about what type of property is in demand in the area. For example is there a demand for family homes or for flats in the area.
• Are patios, terraces or small gardens popular and do they add rental value?
• Are most tenants commuters and how do they travel?
• Is the property on a reliable bus route, close to a station or have easy parking?
• Is it close to bars, restaurants, health clubs or sports facilities if you are looking to rent to young professionals?
For more information on SIPPs, visit the Property Investor Show held from Friday 23 to Sunday 25 September at the ExCel Centre in LondonÂ’s Docklands
