Let to Buy UK:- An overview of the basics

 

LET TO BUY

A brief overview of the considerations

 

By Matthew Duncan Independent Financial Adviser

www.i-financialadviser.com

What is a Let to Buy?

A let to buy mortgage is when the new lender states they are happy for you to keep your existing

property and rent it out. Typically, the Lender will want to know the properties rental income will

cover the mortgage payments and If this is the case the lender will ignore the existing mortgage as a

liability.

Tax Efficiency

•When you have a BTL mortgage or equivalent the property in essence becomes and investment.

•You become labile for income tax on any profit you make.

•Net profit is the difference between your rental income minus allowable expenses.

•One of the allowable expenses is mortgage interest (Not any capital repayment element).

•The Net profit is added to your employed income and taxed at that rate.

•If you reduce the mortgage interest by paying off capital elements of the BTL mortgage you actually

reduce the allowable expense and therefore increase you tax liability. This is not an issue if you have

no other mortgages but if you do have a personal mortgage it is not very tax or risk efficient.

Equity for the next Purchase

If there is equity in your current property it may be worthwhile seeing if you can release some of it.
By releasing this equity you may be able to get a better rate on the new mortgage if the LTV is
reduced. Other key considerations are that by having a lower personal mortgage on the new property you are reducing your personal risk and by loading the BTL you are increasing the allowable expense for tax purposes therefore reducing your tax liability.

Return on Capital Employed

It must be remembered that the property that is being let will become an investment. It is therefore worthwhile looking at the maths to ensure the property is viable as an investment.

A property can return profit in two ways.

1.Capital growth

2.Return on capital

Return on capital looks at what capital has been employed and the return on this capital. For example if £30,000 has been used via equity or introduced (purchase) and the rental profit per year is £3,000 then the return on capital employed is 10%. 

BTL or Consent to Let

•Depending on each lenders criteria and mortgage interest rates you may wish to consider changing

to an official BTL mortgage.

•The other option is you ask your current provider for the consent to let. Typically they will change

you a fee for doing so and leave your mortgage on the same terms. Some lenders will increase your

interest rate to reflect you are renting it out.

•Both types of mortgage are acceptable for future lenders if you are looking to Let to buy.

Buy to let Mortgages

Buy to Let Mortgages
At the height of the mortgage boom many people bought second properties with the aim of renting them out and making a good rental income as well as capital appreciation. When the credit crunch hit many people got their fingers burnt in this market as property values fell and they ended up with losses in equity and mortgage payments more than the rental income.

A few years on and property is still not offering capital appreciation to a worthwhile level for a general buy to let property, however, in line with less properties being sold rents have increase to meet property demand creating a different opportunity for investors.

Whilst house prices may increase in the future it seems with the impending Mortgage Market Review (MMR) being implemented and the country dipping in and out of recession that capital gains on property will still be minimal if at all.

Return on capital (ROC) is now the main focus of a landlord with the possibility of future capital gains if the property is kept longer enough.

Return on capital is how long it takes to get the money back that you put in buying the property, meaning you end up with a property financed by a lender, making you a potential profit with none of your original money invested in it. Currently the most common buy to let mortgages involve clients putting down a 25% deposit. There are a few variances on this with one lender considering applications with only 15% deposit.

ROC

A property is purchase for £100,000 including the costs of purchasing. A £30,000 deposit is put down. The mortgage costs £500 per month and the rent received is £750 per month. The profit is therefore £250 per month before tax or £3000 per annum. This equates to a 10% return on capital. (ROC). Ultimately if tax was not a consideration or any other costs then it would take 10 years to recover the initial capital invested.

What is the Buy to let mortgage?

There is an array of Buy to let mortgages in the market with various criteria’s. One of the most notable disparities is the level of fees charged by the lender to set up the mortgage. Often headline interest rates are accompanied by very high set up costs whilst seemingly worse rates may be better overall. A good independent mortgage broker will evaluate the overall cost and recommend the best deal overall not necessarily the lowest interest rate.

What Tax is there on Buy to lets?

In simple terms the tax you pay on Buy to let is denoted by the profit you make per year (Your rental income minus the interest element of mortgage payments and other expenses). This is then added to your earned income for the year.

For example if you made £5,000 from your property in the tax year and were a basic rate tax payer (20%) then you would pay 20% tax on £5,000 = £1000.

If there are two owners of the property then you would have been deemed to earn £2500 each and taxed accordingly.

Is a buy to let property subject to capital gains tax?.

Any gain you make on a property that is not your main residence is subject to capital gains tax. A gain is considered the increase in value of the property since when it was purchased.

A Buy to let mortgage and multiple property ownership can therefore be a complex area of finance and therefore it is worthwhile speaking to an expert. Invest Southwest Independent Financial advisers can therefore offer value when arranging either the buy to let mortgage or dealing with the financial planning in regards to your property portfolio.

Visit www.I-Financialadviser.com for more details or call 01934 310653.

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"Advice for life"

First time buyer Mortgage hints and tips

by Matthew Duncan Independent Financial Adviser

Estate Agents.

 

• Do get them to work for you. Tell them what property types you are interested in.
• Do not give them too much information about your finances they are acting for the seller.
• When you have found a property you would like to bid on, phone the estate agent and ask them to pass on your offer (it is that simple). This is not legally binding until exchange of contracts (solicitors). Remember do not bid too high initially or too quickly afterwards if your offer is rejected. Whilst £1000 extra may be cheap to borrow per month it still is a lot of money so you must try to get the best value.

The mortgage process

 

Once you have found a property you like then you need to arrange the finance. Your estate agent may ask you for a decision in principle but it is more common for them to phone

the Mortgage broker/Adviser and ask if there is any reason you would not be able to secure a mortgage.

If you have no adverse credit history, a good income, registered on the electoral role then there is no reason you will not get a mortgage. If you need a decision in principle then call your adviser and they will be able to do this for you.

The rates are changing all the time therefore there is no point in choosing a mortgage product month before you are ready to offer for a property. When you have made an offer or are ready to make an offer this will be the point you sit down with your adviser a go through the different products and options to ensure you get the most suitable mortgage.

Once you have agreed the right deal for you the adviser will apply to the lender and take proof of income and identification (and anything else the lender requires) at this point. The lender will do its relevant checks and once they are happy a mortgage offer will be issued. This is typically valid for up to 6 months depending on the lender. It Is now over to the solicitors
 

Solicitors

 

These are instructed after you have made an offer and it has been accepted. It may be prudent to wait for a mortgage offer but this typically slows down the process and if there is no reason that you cannot get a mortgage you may consider telling them to start the searches. Obviously, if you do not proceed and they have started work you may be liable for their costs.

A date for exchange will be set where you will be required to provide the deposit and then completion will be the point where you get your keys and you are a home owner.

Costs to consider:-

 

• Valuation
• Stamp Duty
• Solicitors

With the right professionals involved, buying your first property should be clear and easy.

The payment date you chose for mortgages and loans is important

Will my Mortgage payment date affect my credit rating?

I have experienced more and more of my clients being affected by having a payment date at the end of the month rather than near the start of the month, for their mortgage and loans. This is because of the credit rating system we use in the UK.

Credit Bureaus such as Experian, Equifax and Credit Call to name a few, take vast amounts of data from our Banks, Building societies and credit providers and add them to our personal credit files.

This allows institutions to search your credit worthiness to see if they wish to lend you money or offer you services. This systemic approach to finance is now the norm.

In regards to this approach, you would expect your bank or building society produce data returns for the credit bureaus in the same manor, following prescribed rules to ensure a fair system for all. Well this is not quite what is happening. In the UK we currently have the information commissioner and the FSA that could prescribe a set process in regards to credit reporting.

However when I delved into it further the Banks & Building Societies follow a voluntary code and not one would/could provide me with the details of the code.

So where does your payment date come into this?

Most Banks/Building Societies report your data at the end of the month. If your payment is due on the last day of the month but you miss a payment by one day this will show as a missed/late payment and therefore is a negative for your credit file and future scoring when credit referenced or credit scored.

Now if your payment day was the first of the month you could pay 27 days later on the 28th and this would not show as a missed payment. A bit unfair and inaccurate right!


Matthew Duncan
Independent Financial Adviser,
Bsc, CeMap, DipFA, CeFA, MIFS, CeLTCI
First Floor Office,
1 Kelston Road
Worle,
Weston-Super-Mare
BS22 7FD
Tel 01934 310653 Tel:- 01173 310653
Registered office Tel:- 01823 353970
Fax 01823 339726 Mob 07793130342
www.I-Financialadviser.com

Interest only mortgages , where have they gone?

Thursday, 9 August 2012

Interest only?

In the last year or so Interest only mortgages have become harder and harder to acquire as lenders require un-realistic proof or just will not consider this option. So why has this come about?
The UK financial regulator has been consulting on mortgages in light of the worlds financial melt down that was originally attributed to the sub-prime mortgage market and the impact this has had on the UK Market. The outcome of this consultation is something called the Mortgage Market Review (MMR) which is changing the goal posts for lenders and mortgage facilitators alike.

Rather than having prescriptive rules to follow the FSA create guidance that the providers of Mortgages have to interpret. Now if their interpretations are wrong then the FSA has the power to fine the Banks/lending providers.

This ultimately has left the financial institutions involved running scared. Instead of objective, sensible decisions each has followed the others lead taking Interest only off the menu or making it very hard to obtain. Only a few providers will consider interest only now and typically this is at a low loan to value (low mortgage compared to the value of your house).

So why do we care? Well personally I believe flexibility in the mortgage market is imperative. I personally left University and bought a house immediately with my parents help. This was taken on an interest only basis as I was on a graduate scheme and my starting salary was low. As I earned more I turn my mortgage to a capital & Interest mortgage (Repayment) and eventually reduced the term.
If I was in this exact position today I would still be living with my parents or renting as at the time I couldn't afford the payment on a capital & Interest basis. The impact of this would be another house is not sold in the already stagnant mortgage market. Another little bit of growth missed! NO sale = NO VAT (estate agents, Valuers & Solicitors) and stamp duty would not have been paid! Revenue needed by our indebted government.

So lets look at both sides? What if somebody has an interest only mortgage and at the end of the term has not repaid the money?

Well the first this to so is yes this will happen to some who either through circumstance or lack of planning owe money at the end of their interest only term, and yes this is not ideal.
It is however, my opinion we don't need a nanny state and if these people have not addressed their mortgage requirements then they will have to sell and rent.

Life has consequences and this is one the key thing I am currently teaching my 3 year old daughter. The fact is these people had the opportunity to own their property (which currently is considerably cheaper than renting) which may not happen in the future if we keep using a sledgehammer to crack a nut.

Matthew Duncan
Independent Financial Adviser

www.i-financialadviser.com
01934 310653.
01173 701730