In the not too distant past the process was simple. You finished your degree, obtained a job with a long established company, followed the career path for 40 years and retired at the age of 65 with an inflation proof pension! Unfortunately, those days are long gone.
For a start, those jobs seem no longer to exist; inflation proof pensions are now an expression you may find in Wikipedia and because interest rates are currently so low, some might think it is better to keep any savings stashed under a mattress rather than place it in a deposit account with the bank.
I mention all of this at the outset because one of the best forms of investment currently available is in the Buy-to-Let market. Imagine this scenario: you find a nice three or four bedroomed semi-detached property in a reasonable location; you secure a special buy-to-let mortgage and purchase the property; you spend a minimal amount of capital to spruce up the building and then you find a tenant. The beauty about this operation is that the rent from the tenant pays the mortgage and at the end of the day, you are the owner of a property which you can sell and invest the proceeds elsewhere.
Now I admit that this is a very simple explanation of the process but in essence, this is what the practice is all about.
I have a colleague who, three years ago, set up a business with two other partners. Rather than invest in an independent pension scheme, the three directors have clubbed together and invest a large proportion of their profits in the purchase of a number of buy-to-let properties. Indeed they now have a total of 14 such properties and when the day arrives, the asset value of these properties will provide a far greater pension than had they invested direct in a normal pension scheme.
The secret in all of this is the fact that a buy-to-let mortgage is not financed by you the property owner, but instead is financed from the rental obtained out of that property. In fact, if the entire process is handled correctly and you are fortunate to gain the right buy-to-let mortgage, after the monthly mortgage payments and additional running costs are secured, there is often a small amount of income still available to the owner.
For the owner, profit is made in two ways:
However like everything else in life, matters are not quite as simple and straightforward as it would seem. I mentioned at the beginning of this article, that “if handled correctly” the project could be quite financially attractive. The main criterion, apart from the property itself, is the availability of a buy-to-let mortgage and the costs involved. So let’s take a look at these!
Well it all depends upon your present circumstances! Most mortgage lenders will insist that you currently own your own home, either with or without an outstanding mortgage, and that the property you propose to purchase is a flat or house purely as an investment. Remember, all investments of whatever type are risky and you must always bear this in mind. You can be sure that the mortgage lender will be aware of this fact.
As with most mortgages, you will need to have a relatively good credit rating and show the lender that you, in your own right, will be able to handle repayments in the event that the rental property is vacant or tenants’ payments are in arrears. You will probably need to be earning an annual salary of not less than £25,000.
Most mortgages are granted for a period of 25 years and therefore age is of relative importance. The lender would expect a mortgage to expire when the borrower is around 70 to 75 years of age. Therefore on the expectancy of a 25 year period, it is quite probable that anyone beyond the age of 45 would be unlikely to obtain a mortgage.
The first thing you should remember is that a mortgage used to finance a buy-to-let property is not regulated by the Financial Conduct Authority. This does not mean that the lender should treat you in an un-similar way but if you should have a complaint, you would need to take it up with the Financial Ombudsman Service.
Most lenders will require a higher deposit than one associated with a normal house mortgage. This can start from a minimum of 20% and in certain circumstances may rise to at least 45%. You should also note that most mortgages are granted on an interest only basis, which means that the monthly repayment only relates to the interest and does not reduce the capital loan. This loan will be repaid at the end of the mortgage period when the property is sold. Never forget, this is an investment and as we all know, investments can go down as well as up!
Unlike a normal household mortgage, a buy-to-let mortgage is not associated with the actual value of the property but instead, is directly related to the rental value of the property.
Lenders will typically require a minimum rental income on the property to be anything from 25% to 35% greater than the anticipated monthly mortgage repayment. Anything less than this could very well indicate to the lender that you, the borrower, may fall into difficulty if there is not this cushion to provide protection against a possible future downturn in rental income.
In passing, I would also like to remind you of several other fees that are incurred when arranging any mortgage and they should be taken into consideration when calculating the overall cost. This may include:
The short answer to this is “any bank or mortgage lender that is prepared to grant you a mortgage!”
I know this may sound flippant but quite frankly, it is the correct answer. However the more information and advice you have concerning the variety of providers currently around, the better your chances of securing the right mortgage that affords you the best deal available.
Here is a comforting thought. As recent as April 2014, new rules were introduced that now compel both mortgage lenders and brokers to offer you the best advice that they are able so that they recommend the best mortgage for your needs. These rules also apply to any buy-to-let mortgage.
Obviously, a particular bank is only able to offer the best advice insofar as it will relate to the mortgages they have on offer. Therefore it may well be in your best interests to consult at least one, if not several independent mortgage brokers. They should have access to a variety of different mortgages from a range of individual lenders and by using the information that you are able to supply, they in turn will offer you the best advice, supporting their mortgage recommendation.
Different lenders of course, have different terms and conditions. You need to be aware of these, particularly when it comes to the question of fees. The amount of deposit each lender will require may very well differ depending upon your credit history, your ability to repay the mortgage and the potential rental income from the property you are hoping to purchase.
Whilst the mortgage rate of interest may be fairly static, often there is room for negotiation and over a period of 25 years, this can have a major bearing on the overall cost of the mortgage.
It is therefore essential that you have all the relevant financial, property and potential business information available when you explore and examine the variety of mortgage plans that will be available to you.
You must never forget that owning and operating a property purely for rental income purposes, is a business and as such must be run as a business. You will be required to retain records of rental income, expenses including any costs associated with running the business and of course at the end of each financial year, you must prepare a full profit/loss set of accounts for submission to the tax authorities. Unless you are highly qualified in this aspect of business, I do recommend that you employ the services of an accountant to do these tasks for you.
One question that I came across recently concerned a person who owned their own home but wished to move to another new property yet retain ownership of the initial one. Their main query was could they turn the mortgage on their old property into a buy-to-let mortgage and take out a subsequent, standard mortgage on the new property? The straight answer is “talk to your mortgage lender.” If you are just to go ahead and purchase a second property, thus turning the original one into a rental property, then you could be in breach of the terms and conditions of your existing mortgage, and at the same time in breach of your building insurance policy.
Most lenders will often be asked if the borrower may rent out the property for a short period of time. This usually occurs when the borrower has purchased a new property without first selling the old one and so requires to rent it out whilst a buyer is found. A mortgagor will often agree what is known as “consent to let” providing it is only for a short period of time. Should you decide that you actually want to turn a rental property into your home, you would need to discuss this with your buy-to-let lender as once again, you may very well be in breach of the mortgage terms and conditions.
If you are considering purchasing a property for rental, I would once again stress that not only is it a business, but it is also an investment and as I have stated previously, all investments attract some form of risk! Such risks could be:
If you choose the location and type of property correctly; charge a rental amount that covers both mortgage repayments and allows for running costs, with an element of income yet is well within the scope of similar properties in the immediate area, then you should not have too many problems.
However, since the major cost of any such purchase is the repayment amount of the mortgage, then you must take all steps to ensure that you have the correct buy-to-let mortgage that meets your expectations, is fully affordable and at the end of the day when you come to sell the property, allows you to achieve a reasonable rate of return on your investment.
But do not lose heart! There has been a substantial increase in the purchase of buy-to-let properties within the UK over the last 12 months or so. For the young house buyer, the required deposit of at least 20% of the value of the property is well beyond their capabilities and it would seem therefore that rental properties are not only going to be in huge demand in the future, it would also seem that the values of rental properties will not only hold but indeed increase in the years ahead.