More and more people are turning to residential property as a vehicle for long-term investment planning, in particular, they are using the rental property market as an integral part of their retirement planning. The reasons why are easy to see:-
- Property ownership is widely considered to be a solid long-term investment
- Rental incomes can sometimes be attractive in relation to the cost of buying a property, thereby providing a healthy income yield
- Properties usually (although not always) increase in value over time, thereby providing an increase in the value of the original investment
Whether you are already a Landlord or you want to become one, the chances are that at some point you will need to arrange a Buy to Let mortgage.
But why would you need one?
An ordinary residential mortgage is provided by a lender for an applicant to use towards the purchase of a residential property in which they and their family will reside. However, the terms and conditions of this type of mortgage do not usually allow for the property to be used for letting purposes. Therefore, if you want to let out the property a special type of mortgage is required, known as a Buy to Let mortgage.
How does it work?
Generally speaking, it is not much different to an ordinary residential mortgage except that the lender gives permission for the borrower to let the property using an Assured Shorthold Tenancy agreement (AST). The only visible differences are that the interest rate would typically be a little higher when compared to a residential mortgage, and the set up fees can also be higher, although not always. The other important factor is the way in which the mortgage application is considered by the lender. Although a minimum level of personal income is often required in order to meet rental voids (typically £25,000 per year) it is the level of rent the property can achieve that largely dictates how much loan can be secured against it. In most cases, a loan to value (LTV) of 75% is the maximum a lender will consider, although there are some higher loan to value deals currently available.
Due to recent changes introduced by the mortgage regulator, most buy to let lenders have had to change the way in which they calculate the size of mortgage they can provide in relation to the level of rent that can be achieved, and this has resulted in a general reduction in the size of mortgages being offered to landlords. However, in an effort to help landlords obtain the level of borrowing required, a few lenders have introduced new criteria that allow them to take personal earned income into account to support a buy to let mortgage application, and this can be a great help in instances where the rent alone is not sufficient to meet the standard rent-to-mortgage calculation.
How do I repay the loan?
That is largely up to you. You can set up the mortgage on a capital repayment basis, whereby the monthly repayments include an element of capital as well as interest charged, thereby ensuring that the loan is paid in full by the end of the term, or you can opt for the interest only method. This means that only the interest charged by the lender will be repaid during the term of the loan, and the full amount borrowed at outset will still be outstanding at the end of the term. You will need to find an alternative way in which to repay the outstanding capital at this point, or you can simply sell the property and pay off the debt outstanding.
Who offer Buy to Let mortgages?
There are a number of companies in the market place, ranging from well known high street names to specialist bespoke lenders. A number of these specialists lenders do not deal directly with the public, and are only available to access if you go through an intermediary. It is probably fair to say that the world of Buy to Let lending is a little more complicated than it is for ordinary residential lending, so speaking to a qualified adviser first is always a sensible choice.
Things to remember:-
A rental property is an investment, thereby any profit made following disposal of the asset can potentially attract Capital Gains Tax . The rental income received less costs should be declared to HMRC and may be chargeable for income tax. The cost of insurances for a rental property can be higher than for a residential property. You should be satisfied that you can afford to meet the monthly mortgage payments during periods when the property is not let.
SOME TYPES OF BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
DGS have offices in London, Hertfordshire and the Midlands. We have a dedicated team of Independent Financial Advisers (IFA) and Chartered Financial Planners who can ensure you are receiving the right financial advice and the highest standard of service.
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For a free consultation to discuss your buy to let requirements together with any other financial needsContact Us today
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