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Buy - to - let ( BTL ) investors : eBook

Introduction:

Dear Buy - to - let investors ,

At Mill - House Mortgage Solutions we are impartial & give advice from the whole of market .

We aim to provide you with all the information you need to answer your questions , as well as make an informed decision .

Choosing the right Buy - to - let mortgage is not an easy decision to make . However this is a decision hundreds of investors are making each and everyday .

Can You Afford a BTL Mortgage ?:

The first & most important question any would be investor must ask themselves is can you actually afford a Buy - to - let mortgage ?

Some of the most crucial elements which will effect your borrowing ability are as follows ...

• The Amount of Deposit you have

Although some lenders offer Mortgages up to 95 % of the properties value , most limit the maximum loan to value to 80 - 85 % of the properties value .

This is predominantly because a Buy - to - let mortgage is percieved to be a higher risk than a residential mortgage to the mortgage lender . By limiting the amount of the properties value they will lend against , they retain a small margin to avoid money loss in the event of repossession .

The industry describe your total debts in relation to your net worth as gearing . If your debt to asset ratio is high , you are highly geared . Many people describe the process of releasing equity through remortgaging to invest further as gearing .

• Rental / Personal Income

The properties rental income will form the basis most Mortgage lenders decision as to whether to lend you the money you want . Some will also consider your personal income to ensure you can meet your own commitments in addition to the investment you wish to make .

Unlike Residential Mortgages where most lenders calculate how much to lend you based on a multiple of your income or an affordability calculation , BTL lenders carry out a different calculation to determine how much money to lend you .

They instead check that the investor can cover the monthly mortgage payment plus a percentage on top ( typically 15 - 30 %) from the rental income alone . The term for this calculation is interest cover .

However if your interest cover is well short of whats required ... dont dispair !! There are still many lenders who offer what you need , utilising free income from your personal arrangements .

Remember : Many of the Mortgage Lenders Mill - House Mortgage Solutions deal with offer Buy - to - let mortgages to people in such circumstances , please contact us to discuss your situation .

• Your Financial Commitments

All Mortgage Lenders will asses your existing financial commitments to ensure you can afford the mortgage you are applying for . Generally with Buy - to - let mortgages this is less in depth than it would be for a Residential application , unless there is a shortfall on the required interest cover & we are using surplus income from your private arrangements . Many lenders have specific guidelines surrounding areas of poor financial conduct ( as detailed below ).

• Your Financial Background

As mentioned above your previous financial conduct will be taken into consideration by the Mortgage lender when the asses your application .

All Mortgage lenders have specific guidelines on how to view your financial background . They also each consider negative financial data in various different ways .

If you have limited or no financial background , due to never having obtained credit or loans before , many lenders will limit the % of the property value on which they are willing to lend against ( typically 75 %).

If you have obtained previous credit , however failed to maintain this & run into difficulty , each company will take a different view on your circumstances depending on their internal policies .

If you have a poor credit history , CCJ's , missed payments , defaults , it need not mean you cannot find a BTL Mortgage .

We recommend that if you have fears concerning your credit file , you should obtain a copy of your own report ( for around 5 . 00 ) prior to making an application for a mortgage .

Remember : Many of the Mortgage Lenders Mill - House Mortgage Solutions deal with offer mortgages to people in such circumstances , please contact us to discuss your situation .

The Buy - to - let Marketplace :

The Buy - to - let marketplace has expanded rapidly in the UK over the last 5 years . At the end of 2004 there were over 526 , 000 BTL mortgages in the UK. With an expanding market the average BTL investor is becoming younger & from a much more diverse background .

Some reasons for this growth are...

A growing student population:

The Increase in Divorces:

Inward Migration:

Decreasing returns from equity based investments:

More competition from lenders:

Increased profitability for landlords:

As you can see , some of these factors are tied into the economy in general , whereas others are fuelled by changes in society itself .

The Reasons to Invest in Property :

There are two main reasons why people invest in BTL property ...

• To Invest for a Regular Income

• To Invest for Capital Growth

We will look at both of these area's to help you understand each of them better .

• Investing for a regular income :

Your Buy - to - let investment works when rental yeilds are high enough to meet the cost of the BTL mortgage , support any additional running costs & make a profit . When investing for an income , that income is derived from the profit made .

Below is an example showing how this works ...

Property purchase Price : 100 , 000

Rental Income : 650 per month

Interest Only Mortgage Payment : 300 per month

( based on a loan amount of 80 , 000 & 20 , 000 investment )

Here the annual rental income would provide an income of 7 , 800 . The mortgage only comes to 3 , 600 . So the investor above would receive an annual income of 4 , 200 from their initial investment of 20 , 000 .

This is equal to a return of 21 . 0 %, MUCH higher than the currently available through a deposit based Bank or Building Society account .

However , before you get too excited , this figure does not allow for the running costs involved ( letting agent's fees , maintenance , etc .). It's safe to assume this would equate to at least 700 , which would in turn reduce the income to 3 , 500 a return of 17 . 5 %.

Bearing in mind the average annual income across the UK is 21 , 200 , if you're serious about investing in property for an income , you may need several properties to generate this .

Remember : When relying on property for an income , the investor must consider problems associated with the property not being let & suffering from a rental void . All BTL investors are advised to retain a sinking fund designed to cover these periods .

The basis of a good BTL investment is that the income from the property will generate a larger return than keeping the money in a Bank or Building Society account .

• Investing for a Capital Appreciation :

One of the key factors in generating income ( and most often over looked ) is Capital Appreciation . Basically Capital Appreciation is the amount of profit made as the property price rises due to inflation .

Below is an example showing how this works ...

Property Value : 100 , 000

Rate of appreciation : 5 %

( Traditionally , investors would assume a steady appreciation of 5 % averaged out over a 25 year period .)

In the example above the value of the property after 25 years would be 338 , 700 . Making a profit of 238 , 700 . This equates to 9 , 548 per year .

Of course the explosion of the housing market noted in recent years makes a mockery of such a conservative estimate . The last 5 - 10 years have seen the same rate of increase as the example above !!

Remember : Traditionally , house prices rise steadily over time , over this period they experience peaks & troughs which in turn create short term gains or losses for investors like you . Capital Appreciation is only ever realised when the property is sold , hence timing is everything !

How much money can I make ?:

As we've just covered , the main two reasons for BTL investment are when investing for an Income & when investing for Capital Growth .

Of course in practice the true return of your investment is made up of a mixture of the two . Most investors get both a capital appreciation as well as an ongoing income from their property . Hence when we add these two figures together we get the true investment return .

Below is an example showing how this works ...

Property purchase Price : 100 , 000

Rental Income : 650 per month

Interest only Mortgage Payment : 300 per month

( based on a loan amount of 80 , 000 & 20 , 000 investment )

Property Value : 100 , 000

Rate of appreciation : 5 %

( Traditionally , investors would assume a steady appreciation of 5 % averaged out over a 25 year period .)

Here the annual rental income would again provide an income of 7 , 800 . The mortgage only comes to 3 , 600 . So the investor above would receive an annual income of 4 , 200 from their initial investment of 20 , 000 . If we again assume the costs incurred would equate to at least 700 , the income would in turn reduce to 3 , 500 per annum . Over 25 years this totals 87 , 500 PLUS any interest accrued on this income .

Add the Capital Appreciation of 238 , 700 and you get a total profit of 326 , 200 + from an investment of 20 , 000 over 25years .

This is a considerable return & in itself highlights the benefits of investing in property in the UK . All potential landlords should however take time to seriously consider the risks of house price deflation , rental void periods , damage being made to the property & the cost of associated repayment vehicles .

Types of Mortgage Available & Related Costs :

There are various types of mortgages available :

• Fixed

Here the interest rate charged is fixed for a set period ( i . e . 2 yrs ) before reverting to the lenders standard variable rate . Usually there is an Early Repayment charge if you redeem the Mortgage before that period ends . Typically you will be charged a non - refundable booking or arrangement fee to secure a Fixed mortgage rate .

Benefits : As payments fixed for 2 years a Fixed rate provides security and enables people to budget effectively . They remain unaffected by rises / falls in interest rates .

Drawbacks : As usually tied into deal , unable to take advantage of interest rate reductions . If its necessary to make an unplanned redemption of your mortgage , in the deal period , a large fee is usually payable . Also , If interests rates have risen , there can be a dramatic increase in rate when coming out of a Fixed tie in period .

• Tracker's

Here the interest rate youre charged tracks another interest rate . Usually either the lenders own Standard Variable Rate or the Bank of England base rate . As the rate fluctuates , movements in interest rates usually result in a knock on movement to your mortgage payment . Arrangement or Booking fees on these mortgages are usually refundable , or dont even get charged , if the mortgage doesnt proceed . Many trackers are available without a tie in period , as they do not have a deal period to speak of .

Benefits : Allows the customer to benefit from reductions in interest rates causing a reduction in their mortgage payment . If you want a short - term deal for your mortgage , a tracker can provide a temporary solution until your circumstances change . If you can comfortably afford fluctuations in payments , these mortgages mean you do not have to change your mortgage regularly to secure a new deal .

Drawbacks : Rises in interest rates result in higher mortgage payments . Uncertainty over the future interest rates makes budgeting effectively difficult .

• Discounted

Here the interest rate youre charged tracks another interest rate during the deal period , similar to a tracker mortgage . However this rate is discounted for an initial deal period , making it more attractive to customers by reducing the initial monthly cost . Once the deal period has ended the rate payable reverts to the lenders standard variable rate . As the rate fluctuates , movements in interest rates usually result in a knock on movement to your mortgage payment . Usually there is an Early Repayment charge if you redeem the Mortgage before that period ends . Arrangement or Booking fees on these mortgages are usually refundable , or dont even get charged , if the mortgage doesnt proceed .

Benefits : Allows the customer to benefit from reductions in interest rates causing a reduction in their mortgage payment . Attractiveness of initial rate usually in comparison to available Fixed rates .

Drawbacks : Rises in interest rates result in higher mortgage payments . Uncertainty over the future interest rates makes budgeting effectively difficult . If its necessary to make an unplanned redemption of your mortgage , in the deal period , a large fee is usually payable . There can be a dramatic increase in rate when coming out of a discounted mortgage tie in period .

Its important to remember not all deal periods will run in line with the tie in period , within which you must pay an early repayment charge .

Each option provides a different level of security as to the cost of your mortgage repayments .

To discuss which type of mortgage would best suit your needs , please contact Mill - House Mortgage Solutions & well be more than happy to discuss this with you !

However whichever option you choose , each of them entail many of the same associated costs :

• Booking Fee / Arrangement Fee

An Arrangement fee will be charged by most Mortgage lenders to cover the administration costs of setting up the mortgage account . A Booking fee will be charged to reserve a special deal rate ( typically on fixed rate mortgages ).

• Early Repayment Charge

An Early Repayment Charge will be made by most Mortgage lenders on capital repayments within an initial deal period ( typically the same term as the discounted or fixed rate deal ). The charge is normally made as a percentage of the figure being repaid .

• Valuation Fee's

Many Mortgage lenders will insist on the use of their own approved valuers at the cost of the applicant . Some however will allow the use of your own private valuation made prior to the house purchase offer , as is required by law in Scotland . Typically however a charge will still be made to re - type this valuation for the purposes of the relevant Mortgage lender . In either case it's best to check with the Mortgage Lender on their accepted valuation procedures .

Normally on a BTL valuation , the company are looking for more than just confirmation of the properties value , they also get confirmation of the expected rental income from the property .

• CHAPS / Funds Release Fee

The CHAPS / Funds release fee is made by most Mortgage lenders to cover the related costs of transferring the funds to your solicitors upon completion of the mortgage application .

• Sealing Fee / Closure of Account Fee

Mortgage lenders charge a Sealing Fee / Closure of Account fee to cover the administration costs of closing the account when you redeem the mortgage .

Since recent pressure from the FSA ( Financial Services Authority ) many mortgage lenders have ceased charging a Sealing / Closure of account fees . However some continue to charge them and others have simply re - classified the fee as an administration charge .

• Repayment Vehicle Contributions

Most BTL investors choose to repay their debt on an interest only basis ( See below for more details ). This method of repayment creates the need of a repayment vehicle to clear the outstanding capital at the end of the mortgage . Depending on the repayment vehicle you select , the cost of these can vary . When planning a BTL investment it's best to calculate what these payments will be and incorporate them in your budget planning .

• General Running Costs

As mentioned in our examples above , you will be responsible for the general running & upkeep of the property . This in itself will result in certain costs , in addition to any repair work needed .

An often forgotten cost is the sinking fund also mentioned above . The sinking fund is available money to cover rental voids or vandalism to the property etc . Being a landlord can be an expensive business depending on the tennants you have , hence it's easy to underestimate just how expensive these costs can be if you get squatters etc .

It's important to remember all the above costs will be in addition to your own solicitor's costs , deposit & stamp duty ( where applicable ).

Also there may be Tax Implications on the profit made , for information on this please seek Independent Financial Advice .

Different Ways of Repaying your Mortgage :

In Addition to choosing the right type of Mortgage , you need to consider the most appropriate form of Repayment .

There are three options available ...

Interest Only ( IO ), Capital & Interest ( C & I ) & Mixed ( MIX ).

• Capital & Interest ( C & I ) or Repayment Method :

With the repayment Method you pay off the capital as part of your regular monthly payment . Your monthly payment will contain an element of repayment of your capital in each payment alongside the interest due . The proportion of each will change through the term of the mortgage .

Repayment mortgages have certain advantages ; the debt will reduce with each monthly payment you make , albeit that you will be paying mostly interest in the early years , with the capital repayments making up only a small part of the total monthly premium .

As the debt reduces , the amount of capital repaid increases ; this would normally reduce the debt against the property .

Continuing to make all payments when due guarantees the mortgage will be repaid in full at the end of the term . When repayment is selected many lenders will be more flexible about rearranging payments and altering terms as and when this is necessary .

• Interest Only ( IO ) Method :

With the interest only method , only interest is payable over the term and the capital is intended to be repaid at the end of mortgage by an appropriate repayment vehicle such as ISAs , PEPs , pensions , unit trusts or endowment policies . People have been known to utilise more than one of such repayment methods to repay the debt at the end of the term .

Interest Only mortgages were most popular in the late 1980's when most commonly sold alongside an endowment policy designed to repay the debt & make a modest profit . However in recent years the shortfalls experienced on many endowment policies had led many to opt for the additional security of the C & I or repayment method .

• Mixed Repayment ( MIX ) Method :

With the mixed repayment method , the applicant selects a proportion of the debt on which to pay C & I and a proportion of the debt on which to pay interest only . The applicant would also need to put provisions is place to repay the interest only section as outlined above .

They each have their advantages & disadvantages .

The main advantage of C & I as a repayment method is that this method provides the security of repayment over a given period .

Interest Only may not be able to provide the same security , however it does enable the customer to utilise the investment potential of the accompanying repayment vehicles .

Using a mixture of each method ( MIX ) enables the applicant to have some security of repayment with an added investment potential normally only enjoyed by those who opt to go Interest Only .

Most Buy - to - let investors opt for the interest only method , hoping to take advantage of the increased investment potential & rely on being able to sell the property if they run into financial hardship before the investment potential is realised .

However lenders will offer all three options in most cases .

Remember : The cost of your mortgage payment is crucial when determining interest cover & in turn how much the mortgage company is willing to lend you . Most lenders will still calculate interest cover on the interest only mortgage payment , even when a C & I repayment method is selected . However some will not , and insist on using the full C & I payment in the calculation , this often results in a reduction in what they will lend you .

Which is Best for You ?:

Call NOW on 0845 508 3252 to receive FREE ADVICE on which type of Buy - to - let Mortgage & Repayment method suits your needs best.

Our opening hours are 9 : 30AM - 7 : 30PM Monday - Friday & 9 : 30AM - 1 : 30PM on Saturdays .

Please either ;

call us on : 0845 508 3252 (calls from UK landlines charged at local rates, mobile phone rates vary by cellular service provider)

or

e - mail us at :mill-house@hotmail.co.uk

or

fax us on : 0845 508 3253

or

Write to us at : 9 Leopard Court Norwich NR3 1NN

We aim to respond to all our enquiries within 24 hours of receipt . Within 1 hour wherever possible .

To speak to one of our Advisers about your own Mortgage OR anything in conjunction with it

• Telephone: 08455 08 32 52
• Email: info@millhousesolutions.co.uk
• We will contact you if you complete our Arranging Contact Form

We can then discuss these or any other points you wish to query.

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