Is it too late for buy-to-let

<![CDATA[

Buy-to-let (BTL) has bought thousands of investors a new lifestyle and the extra time to enjoy it.

According to research by Standard Life Bank some landlords are making enough cash to consider giving up the day job completely.

Of the 500-plus landlords questioned for the bank’s survey, 50 per cent were earning £200 more over and above their mortgage payments, 27 per cent are earning between £200 and £500 extra, while 13 per cent are earning up to £1,000 each month.

But this financially rosy picture of a ‘landlord’ lifestyle needs to be accompanied by a reality check, claims Michael Brill, a buy-to-let mortgage specialist at Ilford-based advisers Baronworth.

Brill says fewer first-timers have entered the BTL market in the last 18 months, and for good reason. “Buy-to-let is no longer a way to make a quick buck. An increase in property prices means landlords’ profit margins have been squeezed over the last two years,” he says.

“ Those who bought when property was cheap are laughing, but now you really have to buy a property for the long term, and we are talking at least five years here, to make a decent return.”

Brill says buy-to-let mortgage lenders are doing all they can to coax investors into the market. “Buy-to-let mortgages only used to be available to investors who could put down a 25 per cent deposit, but now some mortgage companies allow you to borrow 90 per cent of a property’s value,” he says.

But again, he advises caution. “The more you borrow, the more rent you are going to have to raise because your mortgage payments will be higher. Rent is already being squeezed, so I always advise first-time investors to try to raise as much cash as possible before getting involved in a buy-to-let purchase.”

Ray Boulger, senior technical director at John Charcol, says the market is still steady enough for first-time investors. He says they could do worse than follow the example of experienced landlords who maximise their rental income by borrowing cheaper, interest-only mortgages. These are extremely popular because in the short term they help investors get on the buy-to-let ladder, keeping their repayments down and therefore their rental income up.

Buy-to-let mortgages.

Boulger also claims mortgage lenders’ rental cover requirements are likely to fall further this year which are used to calculate how much an investor can afford to borrow.

Boulger says a few years ago lenders would require borrowers to cough up at least 125 per cent of their interest payments. “Now there are some lenders who require 115 per cent,” he says.

Buy-to-let investors are also opting for lower interest rates but higher arrangement fees, claims Boulger. He points out the popularity of Mortgage Works’ first-time-buyer BTL mortgage last year. It offered investors a low-interest loan of 4.99 per cent but with a higher arrangement fee.

Whereas the typical arrangement fee is £600 for a buy-to-let mortgage, Mortgage Works instead charged investors a percentage – 1.5 per cent – of the amount borrowed.

Tricks of the trade.

Employing a solicitor or an accountant tax specialist is another tool used by experienced investors.

According to Nick Gardner, director of Chase de Vere mortgage management, many BTL borrowers make the most of their annual capital gains tax allowance – the tax paid on property or shares. He says married investors, or those in long-term relationships, put the property in joint names, which means they can make £17,000 a year without having to pay a penny in capital gains tax. Owning the property as tenants in common rather than as joint tenants meant they could also divide the property into ‘shares’ with whoever pays the least income tax owning the larger bit.

Gardner says investors also cash in on “taper relief” on any capital gains tax by buying in an area where the property could be counted as a holiday home.

Research is everything.

But be warned, says Peter Charles, chief economist at Mortgage Express: many new investors still fail to understand the risks they are taking.

Just because an area looks rentable does not mean a landlord can make a profit. He says people have bought properties in places like university towns, only to find a lot of other landlords have got in on the act too.

“ Understand your market and don’t underestimate the value of good tenants. That is when you really will benefit from any rises in property value.” Charles believes interest rates are likely to fall this year, which will ease the pressure on landlords. “But it’s a double-edged sword: you want your property to be worth more, but you don’t want prices to be too high if you are looking to buy more rentable homes.”

The outlook for the market looks good, however, with 16 million potential tenants looking for good-quality properties.

Andrew Moss, product development manager at Mortgage Express, claims renting has become a lifestyle and not simply an affordability choice. “Whether people can afford a mortgage remains a key driver of the market with renting still cheaper than buying. But in addition research suggests people view renting as a positive lifestyle choice, with real benefits.” He says renting offers flexibility in terms of movement, as well as less responsibility in terms of property maintenance.”

Rod Murdison, owner and chief adviser from mortgage advisers Murdison & Browning said investors should also think of their buy-to-let property as their pension. “You’re never too young – most of our buy-to-let clients are in their late 30s and early 40s and plan to use their properties to fund their retirement.

CASE STUDY:

The first-time Investor.

“I’m just about to complete, hopefully, on my first buy-to-let property,” says David Blower. At 23 David says he was encouraged to take the plunge by his parents, who helped him out with the £50,000 deposit.”

As an estate agent David knows his market and has chosen a property in the road next to his own home in Epping, Essex. “My parents suggested it. It may sound a long way off, but this will be my pension. I know there is a big demand for homes around here; we are on the outskirts of London and quality of life around here is good compared to some of the inner-city areas. I shopped around for my mortgage; I went to my bank first, but in the end decided to go with an adviser. He’s brilliant – I’d trust him with my life!”

David decided against an interest only mortgage and has opted for a discounted repayment loan. “I want the security of knowing what my payments are, and that I am paying off the entire mortgage.”

CASE STUDY:

The Experienced Investor.

Selling his company to a large investment bank five years ago gave David Osbourne the cash to buy his first property outright.

When the price of that property rose by over £70,000 David decided to enter the buy-to-let market as a serious investor, using the equity from his first buy-to-let to purchase four other properties.

He split the money, which enabled him to put down a 25 per cent deposit on each. “I then took out a mixture of mortgages, two fixed and two variable, with different providers, the Mortgage Works and Mortgage Express.”

“ At that time, my portfolio was worth over £2 million,” says Osbourne, who has since sold two of his properties. The 48-year-old now owns three buy-to-let properties worth around £1.7 million in total and producing £6,000 – around £2,000 per house – in rental income, which he offsets in terms of capital gains tax against his mortgage.

David recommends going through an adviser and opting for an interest-only mortgage. “After all, it’s an investment, not a home,” he says. “Also, having a mortgage has enabled me to offset my tax affairs, in a way I couldn’t on my first property because I’d paid cash for it.”

]
]>