What type of mortgage should I have?
Repayment v Interest Only - A lot of people fall into the trap of thinking that they have to own the property outright at some stage and must therefore decide to go for a repayment mortgage. However, we would step back and say this venture in most cases is as an investment, and should be treated like one. You should be looking to attain the highest possible return on the investment you have made. Don't let your heart rule your head. There are three strong reasons for considering interest only and they are as follows;
Lenders will calculate the amount you can borrow on a given property against the rental income that it can produce. Most lenders insist on the rental income being at least 120-150% of the mortgage payment. If you are using the repayment method then because your mortgage payment is higher, you may not be able to borrow as much as if you were using the interest only method.
When you stipulate that you are going to have a repayment mortgage you are committed to making higher monthly payments. If you encounter any periods of having no tenants or even rent arrears, then this is going to hurt your cash flow to a greater extent, than if you were just committed to paying the interest only. Ask any business person and they will tell you that cash flow is vital for a successful business, which is what you are running when entering the buy-to-let arena.
The interest portion of your mortgage payment is allowable for tax purposes. On a repayment mortgage the proportion of interest you pay gets smaller as you repay the loan, therefore the tax you pay will become greater over time.
Fixed & Capped Rates - This type of mortgage enables you to budget. You always know what you are going to pay. Even when interest rates are rising you will not have to worry about approaching your tenants to put the rent up because you can no longer afford the mortgage payments.
The downside of these types of mortgages is that normally you have a hefty redemption penalty to pay should you want to sell the property or change mortgage lender during the fixed or capped period.
Flexible Mortgage - What this mortgage allows you to do is overpay when rental income is good to build up a reserve should you need funds for repairs, a tax bill, being between tenants or even as a deposit for your next property. Interest is calculated on a daily basis so any overpayments you make save you interest from that day. These schemes generally allow payment holidays or the mortgage payment to be made from the reserve that you have built up. This type of scheme is generally offered through lenders who do not have a high street presence and they therefore have lower overheads. These savings are passed on in the form of better mortgage rates.
The downside of this type of mortgage is that the rate is not controlled and can rise as well as fall. However, there are some flexible schemes that have their rates fixed.
Discounted & Tracker Rates - A discounted rate is the only rate that guarantees that you will pay less than the lenders variable rate. Discounted schemes can reduce your payments down at the outset, whilst you are looking for tenants.
The downside of this type of mortgage is that you are at the mercy of either the Bank of England base rate or the lenders variable rate.
Professionals
These are the preferred tenants for buy-to-let lender. It usually signifies that the property is in a good area. From a lenders point of view that means good property growth and easy to sell on. Generally speaking this type of tenant has a history of looking after your property.
Families
This is the next best type of tenant to aim for as far as buy-to-let lenders are concerned. Generally the property being suitable for a family should easily be sold should the need arise.
Students
Excellent income producer. Not many lenders in the buy-to-let sector will allow student lets. This is especially the case if the property is split into bedsits. This is all down to the difficulty in converting the property back into a 'normal' residential home should the need arise. The reason lenders are offering residential rates is due to the underlying property being a residential property. If it is split up into bedsits then they will consider that to be commercial. If all the students sign the one tenancy agreement a lender is more likely to lend than if there are several tenancies.
DSS or Asylum
This type of tenant can be good for landlords in that you do not have to worry about collecting the rent as it is paid by the local authority. The downside for lenders is that the local authority sets the rent by looking at the going rate for the area. There is also a problem in that if the lender (or you) needs to take possession of the property, it may prove difficult to get vacant possession as the tenancy agreement is with the local authority rather than the tenant. Some lenders will consider DSS, but not asylum, which is considered on a commercial basis. These types of properties are generally in less affluent areas and historically these types of tenants have not got a good record of taking care of the properties.
Did you know? If your tenant receives housing benefit and it is later found out that they were ineligible for this, then if you receive the rent directly from the DSS, they WILL reclaim it back from YOU. If the rent comes from the tenant, then they will reclaim it back from the tenant
Housing Association
As above apart from they are normally aimed at families and the housing association use a vetting procedure. Therefore, some lenders will consider these. Insurers do not like this arrangement due to the fact that you may not have any control over what tenants go into the property. Could be asylum seekers?
Company lets
Again as this type of property is aimed at professional, the fact that the property is sublet (people paying the rent are not living in the property) is still acceptable to some lenders providing the tenancy agreement is not too long.
Should I use the services of a letting agent?
As a general rule of thumb, if you are not in the vicinity of the property or have no experience of letting a property out, then it is probably better for you to use the services of a letting agent. Unfortunately there are no standard qualifications required to become a letting agent. Anyone can call himself or herself a letting or management agent and not have to worry about being licensed or undertaking any formal training. If you are going to use the services of an agent it is advisable to choose one that belongs to one of the main Associations such as ARLA, ISVA, NAEA or RICS. Membership of these associations involves the agent complying with various rules and procedures set down by the Association.
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What does a letting agent do?
A letting agent is responsible for looking after your property. A letting agent also knows the area and probably can get your property occupied quicker than what you can. They will vet prospective tenants for you and collect the rental income. They will also take care of inventory's logging all your possessions and the state of repair. This will again be checked when the tenancy is over. The letting agent is also impartial between you and the tenant and will make sure that any complaints the tenant has are passed on to you or dealt with if minor, to minimise the chances of breach of contract.
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What does a letting agent charge?
A letting agent on average charges between 8% and 15% of the rental income received. (Letting agents fees can be offset against your taxable profits.)
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What type of property should I purchase?
Definitely select a property that can be sold on again quickly. If being a landlord/lady is not for you, then you will at least want the experience to be as painless in the pocket as possible. Do your homework and check the area out (is it close to amenities etc.) and also look at the rental demand. Would your mother, wife or sister feel safe returning to the property after dark? Remember if you would or wouldn't live in the property will other people?
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Where should I purchase a property?
Don't fall into the trap of thinking that the property needs to be local to you. There are letting agents all over the UK. This venture is an investment and therefore you should invest your cash in the best area possible to give you the best returns.
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What is the ideal term of years for buy-to-let investments?
Buying a property to let out should not be viewed as a short-term investment. The longer you can retain the property, the more the chances are of you making a tidy profit
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Is there a limit to the number of properties that I can own?
No! You can have as many properties as you can afford. Some lenders will restrict you to having a certain number of mortgages with them, however, there are plenty more lenders to choose from.
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I do not earn much money and I have a fairly large mortgage on my main residence, can I still get a mortgage on a property to let out?
Yes! Buy-to-let lenders are more concerned with the property than you. This is because it is the rental income that is going to fund the mortgage rather than your income. Let's face it you are putting down a sizable deposit, so it is you not the lender that is taking the risk.
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What sort of tenancy agreement should I use?
An Assured Short hold Tenancy agreement (AST) for a period of 6 or 12-months is the best tenancy agreement to have as far as lenders are concerned and is the most popular type of agreement in use. These agreements can be purchased from anywhere; however, they are very general and may not fit exactly what you are looking for. It is worth spending a little extra to get your solicitor to draw up an agreement that meets your individual requirements.
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My spouse is a non-taxpayer. Can I act as guarantor so the property can go in my spouses name to save tax?
Yes! As well as being possible, if you are a high rate taxpayer it is probably advisable.
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I am a higher rate taxpayer and I have a limited company, can I use it to acquire a mortgage, to purchase property and pay tax at the small business rate?
Yes and No! You can purchase property through a limited company, providing that is the sole reason the company was set up for. The reason for this is that if the original company went bust, then the liquidators could claim the property and the lender may not get it's money back.
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