Is a Buy to Let property an alternative to a pension?
No pension other than state? Or do you have a pension that may not give the return you may need in your latter years? Do you want control of the income and something that will have a tangible value?
Deciding to invest in property or starting a business by becoming a landlord is not just about owning a property, it should be looked at as a business venture, with the objective to run efficiently, cost effectively and sustainably.
Understanding your investment
It is very important that you understand
a) its investment potential b) the risks involved and c) what you can commit to the investment. We at MM Financial we've been involved in running a lettings company for the last 10 years so we are extremely experienced in this field.
Sole trader or Limited Company?
You may consider setting up a limited company as there are benefits to be had here in respect of what you can offset for tax purposes etc. Speak with an accountant for more information, we can recommend one for you if you have never experienced this before.
What is a Buy to Let Mortgage?
Apart from the purpose of the mortgage, the main difference with a buy to let mortgage is that the lender takes into account the rent you will earn from the property as the primary source of income.
Therefore, the risk to the lender becomes greater and they require bigger deposits, usually in the region of 25 to 40%.
Typically, lenders will want prospective rental income, verified by independent sources, to meet at least 125% for lower tax payer and 145% for higher rate tax payer, at a monthly interest rate of the lender. This may be based on a set rate or the rate offered. Occasionally the lender may also take into account your personal income if there is a small shortfall on rental income, this is called top slicing.
Lenders have changed dramatically in the last 5 years. They used to be extremely flexible but are now far more cautious when offering Buy to Let Mortgages.
Each lender will look at you in different ways. You may be a first time Landlord or Property Investor and have never owned a property before, or you may be an experienced Property Investor.
Now more than ever it is important to understand that lenders are a law unto themselves, so having advice from M M Financial working with you will ensure a much smoother transaction.
Contact us or call 01635 282 752 if you would like to discuss your mortgage options.
Our Service - Finding the right Buy to Let Mortgage for you
Demand for the rental sector is likely to remain strong and potentially grow, offering an alternative to other forms of investments for savings or pension planning. Future of housing will only become stronger so those that can invest should, whether it is for private long term letting or for holiday intermittent letting, there are mortgages for all. Remember, you will always have an asset to potentially turn into cash or to leave your loved ones, unlike a pension pot that goes when you do!
However, finding the best buy to let mortgage has become more complex and this is where our expert advice will help find the best deal for you to maximise profits, and help plan your portfolio by understanding your strategy both now and in the future.
There is no guarantee that the property will be continuously let, for many reasons, so employing a good agent will be worth its weight in return. We can recommend an agent if you so wish.
At MM Financial we are well placed to assist. We specialised in property management for more than 10 years and will ensure all areas have been covered now and for the future, so we know first-hand what is involved and we still partner with an independent lettings company so as to keep regulation and legislation up to date.
Ready to Invest? Consider the advice below
The first things to consider should be:
- Do you have spare time?
- Are you ready to seek out facts and information?
- Are you prepared to accept responsibility on issues of safety?
- Are you willing to consult others for advice?
- Are you prepared to accept an element of risk involved in making a business deal?
And as a starting point, you must:
- Understand an assessment of the profitability of your proposed property to let
- Be aware of your legal obligations / safety issues
- Be tax aware - carefully read our up-to-date tax guide for landlords which sets out the basics. This is a good starting point for you
- Get advice, speak to us to find the best buy to let mortgage deal available. We can also recommend accountants and solicitors depending on your individual requirements
Frequently Asked Questions about Buy to Let Mortgages
To work out whether a property is likely to be a good investment, you need to work out all of the costs that you will incur and what the potential returns are. Start by correctly breaking down the costs including the costs of buying the property, the costs of running the property and the costs of selling the property, Our expert advisers will help with this.
There are many costs to consider when purchasing a buy to let property. Below is a list which will help you with your budgeting. The list is not exhaustive and is subject to a purchaser's position.
- Broker fee
- Lender’s arrangement fee
- Lenders booking fee
- Valuation fee
- Solicitors fee
- Possible accountants fee
- Property set up fees of various
In addition to these costs, you will also need a deposit which is typically 25% (as an average), of the property's value or purchase price. We will be able to advise you on this.
Stamp duty tax liability for anyone purchasing an additional property has increased. Anyone who buys an additional residential property, including second homes and buy-to-lets, will have to pay an extra 3% in stamp duty. The additional charge applies above the current stamp duty land tax rates.
This means there will be 3% tax to pay on homes worth up to £250,000, 8% tax on homes that cost between £250,001 and £925,000. Homes worth £925,001 up to £1.5m will be subject to 13% stamp duty and those over 1.5M this amount will incur a 15% charge.
In practice, this means that someone buying a £300,000 house will have to pay £11,500 of tax.
These can vary due to many different factors. The highest cost of a buy to let investment is typically the mortgage, so it is extremely important to make sure that you keep this as low as possible throughout the process and into the future.
Buy to let Mortgages are generally set up on an ‘Interest Only’ basis so as to fit the general calculation of affordability to lend. However, they can be on a repayment basis or you may wish to overpay (see our information on ‘final options’).
We will help you find the best mortgage deal for your circumstances. You also need to consider letting agent set-up fees and ongoing management costs (if you decide to go down this route), the cost of finding a tenant, buildings insurance, gas and electricity safety certificate and landlord's insurance to cover things like bad tenants and damage as well as ongoing maintenance costs.
You should also take into account the likelihood of the property being empty for periods, during which time you will not be receiving rent.
Typical Example of a Buy to Let property worth £250,000
Assuming an income of £1000 per month, the annual yield for this property is around 4.8%
Capital costs:
Mortgage 75% of £250,000 = £187,500
Stamp duty = £7,500
Deposit = £62,500
The ongoing financial costs:
Annual mortgage costs on an interest-only mortgage £187,500 @ 4% = £7,500
Building and contents insurance = £338
Gas and electrical safety certificate = £150
Inventory = £100 to £300, depends on property size, type and furnished/unfurnished
Landlords insurance = £300
Ongoing lettings costs: typically = 6 - 9% of annual rental income depending on the level of service required
Annual gross yield:
Is an expression of the gross income as a percentage of the capital investment. To calculate this, First work out your gross rental income (the annual rental income). Then divide this figure by the property purchase price, and x by 100. This gives you the gross annual yield pre costs. The average annual gross yield for a buy to let property ranges from 4-8% depending on the type of let and location.
Return on investment:
Is an expression of the total return, including all income and capital growth minus costs, as a percentage of your capital investment.
Contact us or call 01635 282 752 if you would like to discuss your mortgage options.
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From clients that have worked with Martin and the team.
MM Financial is a trading style of Westberks Properties Ltd, which is an Appointed Representative of Stonebridge Mortgage Solutions Ltd. and is authorised and regulated by the Financial Conduct Authority. We are entered on the Financial Services Register under firm reference number 604386. Westberks Properties Ltd is registered in England and Wales under company number 08204168 at registered address 25 Elvaston Way, Tilehurst, Reading, England, RG30 4LX.. As with all insurance policies, conditions and exclusions will apply. Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority. Fee Statement – We do not normally charge a fee for arranging your mortgage however it can depend on your circumstances. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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