How does Equity work?

The concept of equity is quite simple and in practice is a great way to see a return from an investment.

Whether you are purchasing a family home or a buy to let property for rental purposes, the location and aesthetics of the property are crucial for its potential.   

E.g

2016
Purchase Price £220,000 
Mortgage Attained £198,000 (10% Deposit)
4 Bed property bought just outside of the M25 
Walking distance from station
Local supermarkets not far
Good school catchment area
En-suite Bathroom

2020
The same house sells for £300,000
The Mortgage balance has been decreasing repayment after repayment for the last 4 year
Mortgage Balance (guesstimate) £188,000 (Dependent on interest rate)

This means that on the property you bought for £220,000 in 2016, you have made £80,000 as the value has gone up by this much across the 4 years.

When you sell the property for £300,000 you will clear the remaining Mortgage balance of £188,000 and be left with £112,000

You will then have other fees like solicitor fees, capital gains tax (on the *gain, not the sale price) and if you sold your property before the fee free period on the Mortgage product you are locked in to, you may have to pay an exit fee.

*The gain here is £80,000

All in all, worse case scenario you are left with £90,000. That is a profit of £68,000 when you take away the £22,000 deposit you initial invested for the property.

This is why many people buy properties well outside of London, fix them up and then sell them on. The money that can be made is mind blowing. However, that is only possible if you get it right!

Next week I will be speaking about what questions to ask and what to look out for when you go for a house viewing.

Do HMO and Buy-To-Let properties require different Mortgages? | Q&A Series

Reading Time: 2 mins

Yes. 

Whether you go directly to a Bank or use a Mortgage Brokers, something many Buy-to-Let property owners will find challenging is having a HMO.

What is a HMO?

A Household in multiple occupation. 

This means that a property rented out by at least 3 people who are not from 1 ‘household’ (for example a family) but share facilities like the bathroom and kitchen. It’s sometimes called a ‘house share’. … You must have a licence if you’re renting out a large HMO in England or Wales.

REMORTGAGE

Before your Mortgage Broker approaches or advises that you submit an application with a particular lender, it is important that you understand that lenders policy. This is because you could go through the credit search, application process and find out that your application is rejected once the valuation is carried out. This would be down to the fact that the surveyor has observed that your property isn’t a conventional BTL property, but a HMO.

PURCHASE

Ideally you would of applied to your local council for a HMO licence during the negotiation/Purchase Offer stage as the licence can take a while to come through. 

Featured Image source: Google

Buy-to-Let Mortgages for First Time Buyers & First Time Landlords | Q & A Series

For the remainder of the year I will be dedicating all posts to answering Questions from our readers. Have you got a question or would you like me to cover something I haven’t written about in the last few weeks? Scroll down to the bottom of this post and reach out to me via any of the listed channels. 

“I live at home with my parents, but I want to buy a property and rent it out. Is this possible?”

Reading Time: 5 mins

Yes, this is called a Buy to Let property and you’ll need a 15% deposit. However, you cannot buy these kind of properties using a Government scheme.

IMG_0231

Today we are going to focus on the Buy to Let Mortgage, but you also have the consumer buy to let and consent to let route.

Here’s a quick breakdown of the other two types of letting routes which we are not going to discuss today:

Consumer Buy to Let – you lived in the property, bought another place/moved back home, got consent to rent out your property from your mortgage provider and eventually remortgaged with another lender on a consumer buy to let mortgage.

Consent to Let – You have a residential mortgage, for whatever reason, your lender gives you permission to let your property for a specific amount of time (e.g 1 Year) or indefinitely. Once you’ve come to the end of this agreed time, you move back in to the property, sell the property or get indefinite permission to Let and Remortgage elsewhere on a consumer buy to let Mortgage product.

How to guide – It’s fairly simple:

  1. Find a property
  2. Find out the average monthly rental income in that area
  3. Agree a purchase price
  4. Deposit – have you got at least 15%? **
  5. Apply for a Mortgage
  6. Understand that once the valuation takes place, the surveyor isn’t only valuing the property, but giving a figure for your expected rental income
  7. You get your Mortgage Offer
  8. Touch base with your solicitor and continue the Post-Offer process with them. ..

 

** Some lenders offer 90% LTV (this means a 10% deposit) products for Buy to Let Mortgages. However for a first time landlord, you will have to find the right Broker and search high and low for the right lender as not many lenders lend to First-time buy to let buyers – the common trend is that you have to have your residential property for at least 6 months before buying a BTL.

 

Tax – Something else to think about.

No income goes unnoticed and this is particularly the case for rental income.

The income tax rates for the 2019/2020 tax year are as follows:

  • Higher rate tax band (taxable income of £46,351 to £150,000) = 40%
  • Additional rate taxpayer (taxable income of over £150,000) = 45%

Tax bands are slightly different in Scotland

If you earn £15,000 from renting out your property, for example, the first £11,850 is tax-free, so you will only pay 20% tax on the remaining £3,150, which comes to £630.

However, bare in mind you may also have a full-time job, your rental income will be added to your annual salary, which may increase what you pay in tax.

In any case, the HMRC will work this out for you when you declare your income.

Things to consider:

1.Tax Return – Make sure you do one online before 31st January (or a paper return by the 31st October)

This is important, so that when you remortgage or buy another property, your rental income can be evidenced and used for affordability. Even if your income is below the threshold and your rental income is not taxed, your Tax Return will still need to be done evidencing £0. You also don’t want to get in trouble with the law! 

2. Do you want the property in your name? Limited Company maybe? Explore your options and benefits.

3. Extra income is great, however remember to take unexpected expenses in to consideration. Have an account solely for your rental income and Mortgage payments and leave all miscellaneous money/profit in there. Why? If your tenant doesn’t pay the rent, you need to replace the boiler or an unfortunate event takes place that your insurance doesn’t cover, you don’t want your property to become a devouring burden. The aim of the game is to make your property pay for itself and then some…

4. Managing Agent. Are you going to have your property run by an Estate Agent and simply collect your income at the end of the month? They will respond to any call outs, ensure you get your rent on time even if the tenants don’t pay, deal with your insurance and gas safety certificate etc. Explore your options – remember nothing in life is free, you have to pay the agency.  The management of your property could cost you 10% of your rental income. Are you wiling to take this deduction for peace of mind?

I hope this has helped! I would love to hear your thoughts.

Comment below, get in touch via my various platforms.

Remember if you have a question, the next 4 Mondays could feature yours – just ask!

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