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.

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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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ERC’s | Early Repayment Charges

The In’s and Outs of Early Repayment Charges

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Reading Time: 2 mins

Last week we spoke about fixed vs variable interest rates.

You can save money by changing your Mortgage provider regularly when your current rate/product expires.

Unfortunately you cannot switch Mortgage providers or rates whilst still locked in to a product. If you decide to sell your property/switch product regardless of your rate not yet expiring, you will be subject to something called an early repayment charge.

Early repayment charges are worked out in percentages and are outlined in your Mortgage Illustration/KFI

For example:

Property Value: £175,000

Mortgage: £144,075

Product: 1.74% 2 year fixed rate

Expiry date: 30/04/2020

Your document will say: You have the right to repay this loan early, either fully or partially.

BASIS OF CHARGE
2.00% of the amount repaid on or before 30/04/2019

1.00% of the amount repaid on or before 30/04/2020

The maximum early repayment charge you will pay is £2,876.44. Should you decide to repay this loan early, please contact us to ascertain the exact level of the early repayment charge at that moment.

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The above is self explanatory, if you do decide to remortgage and break/cut your product short, be prepared to pay the extra few thousands in ERC’s.

Remember the ERC of every Mortgage will not be £2,876.44 as above, the ERC is worked out based on your current Mortgage balance and the remaining term of your Mortgage. A slightly higher loan amount on a longer fixed rate product will have a higher ERC descending accordingly year by year like the above.

When you sell your property the same applies. When you sell a property, the funds you receive for your property cover the Mortgage balance and the excess is yours for the taking.

If you complete on the sale of your property whilst locked in to a fixed term product, you will be subject to early repayment charges.

This is why when people desire to sell their property within the next year or so and their remortgage is due, they tend to go for a product that is not fixed and does not contain ERC’s or they stay on the variable rate. This allows rooms for flexibility, however a down side to this is that their monthly repayments may be slightly higher than they would be if they were to be on a fixed term product containing ERC’s.

Interest Rates: Fixed vs. Variable

Save £5,000 a year by regularly switching Mortgage provider

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Reading Time: 3 mins

So you have a fixed rate mortgage, it’s due to expire, however you don’t have time nor do you see the need to tamper with it.

A fixed interest rate can last for 2,3,5 or 10 years.

What this means is that for however many years the rate you are currently on is fixed for, your monthly payments will remain the same. Once your fixed term has expired, your mortgage switches to something called the variable rate.

The variable rate tends to be 1.5-2.5% higher than the fixed rate and is provided to you on your KFI/Mortgage Illustration document.

For example:

Value of the property
£480,000

Mortgage Balance
£361,935

Current rate with “X” Bank:
A 5 year fixed rate of 1.89% until 31/09/2023

Variable Rate:
4.24% thereafter

Your current monthly mortgage payment is £378.45

Your monthly mortgage payment on the variable rate once your fixed rate has expired is £848.89

That’s £470.44 more per month. That’s double your usual Monthly mortgage payment and then some…

Across 12 months, that’s an extra £5,645.28. By switching Mortgage Provider or going on to a new product with your current mortgage provider, you’d save yourself £5,645.28.

Of course not everyone will save £5,645.28 due to variable payments and Mortgage balances varying per Mortgage Provider. After-all everyones circumstance is different, however one thing you’ll all have in common is the amount of money you could save by switching mortgage products and not staying on the variable rate.

Can I switch rates earlier (every 6 months) and save more money by going on to a lower interest rate elsewhere?

No. If you could, lenders wouldn’t benefit. You are locked in to the rate for 2,3,5 or 10 years. If you break the contract before the rate expires, you will be obliged to pay an ERC – Early Repayment Charge.

ERC’s – another post, another day Due 24th September