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

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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

What is the difference between using a Mortgage Broker vs. Going direct to the Bank? | Q&A Series

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In 2015 my mother gave me some great advice. She knew that I had the desire to get my foot on the property ladder and as I had no idea where to start, she advised me to go to the Bank with my then fiancé and see what we were “worth”.

As my fiancé worked for HSBC at the time, we booked an appointment with a Mortgage Advisor, disclosed our salaries, savings, commitments etc and based on our situation she gave us a flat maximum amount that we’d be able to borrow.

This meant that regardless of what property we found, that’s the maximum Mortgage amount that we qualified for.

I can’t remember what that max lend was, but let’s just say for arguments sake that it was £300,000. This means that even if there were mortgage deals at HSBC where you could get a 90% Mortgage with a 10% deposit and the property we sought after was £450,00, we would have to cough up £150,000 and not the simple 10% deposit of £45,000 that the product suggests. This is due to what we were “worth” and the maximum HSBC was happy to lend to us based on our salaries, credit score etc.

I hope this makes sense.

Here’s where Mortgage Brokers come in to play…

There are numerous High Street Lenders, and I suppose my finance and I could of gone up and down the streets from various bank to the next getting a rough idea of what they’d lend us, but this is extremely tedious and time consuming.

Our next point of contact was a Mortgage Broker which my finance found on Google – Alexander Hall.

We got in touch with a Mortgage Broker who was amazing! He offered an amazing service and until this day, I still remember his name.

The Mortgage Broker took more or less the same information we provided to HSBC and sourced which lender would give us what we were looking for.

“Source” the phrase used to describe the action taken on a system similar to Google for lenders. Most lenders are on this system and the great thing is that some Mortgage Brokers get exclusive rates and deals from lenders. For example the lowest rate at TSB if you were to walk in to a High Street Bank could be say 2.04% however with a broker, they have access to exclusive interest rates like 1.69% for TSB opposed to the 2.04% High Street rate. That’s a huge difference!

To cut a long story short, the Broker found us a lender that was willing to lend us way more than HSBC and we were able to then look for an affordable property, make an Offer and secure a Mortgage.

Round up.

The 3 Major difference between a High Street lender and a Mortgage Broker are:

1. Time

High Street Lender

They tend to have a 2 week wait for you to be able to secure an appointment with a Mortgage Advisor.

Application to Mortgage Offer can take anything from 1 Month – 6 Months.

Broker

For many no appointment is needed. You can get in touch with your Mortgage Broker over the phone/on email with the option to book in a face to face meeting if that’s your preference. However some brokers require face to face interaction like Capricorn Financial and Alexander Hall due to verification etc.

You also have the option to do everything online and through a chat window. Convenient and no need for any face to face interaction or time consuming meetings. Brokerages like Habito and Mojo operate in this kind of manner.

Application to Offer can take anything from 3 working days to 21 days. (I’ve seen case where a full Mortgage Application was submitted and an Offer followed immediately after due to the lender being able to verify the applicants electronically and carrying out a desktop valuation) – rare but possible.

2. Interest Rates

High Street Lender
What you see is what you get.

Dependent on the Bank of England base rate.

Not many options

Broker
Options galore.

You can play with the term length and Mortgage features (E.g cash back, free legal representation, split terms, payment holidays)

The Broker will be aware of when new rates are going to be introduced/when old rates are going to be pulled off of the market.

3. Convenience

High Street Lender
They will require hard copies of documentation

Proof of ID

Proof of Address

Bank Statements etc.

Broker
Hard copies of documentation not required

PDF copies acceptable

The convenience of being able to email across any additional information required from you.

Some people don’t like the idea of using unpopular lenders like “The Mortgage Works” or “Atom”, but if getting value for your money is important to you, I highly suggest using a Mortgage Broker.

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?”

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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!

LinkedIn Ashanta Charm

Twitter  @AshantaLC

Instagram  @Ashanta_

The 2018 Budget – Things you need to know

Stamp Duty – Travel – Income Taxes – Brexit

Reading Time: 4 mins

What does this mean for First-Time Buyers?

Nothing much has changed here.

However, for First-time buyers purchasing a property using the Help to Buy Shared Ownership scheme, an anomaly was fixed. Previously, buyers of a shared-ownership property would be taxed on the full market value of the home (up to £500,000) rather than only the share they were buying. If the full market value of the shared-ownership property was more than £500,000 the buyer would not have been eligible for any stamp duty reduction at all.

So, a buyer paying £125,000 for a 25 per cent share of a new home valued at £500,000 would still have had to pay £10,000 stamp duty – equivalent to five per cent of the sales price above £300,000.

Now, First Time buyers purchasing a property using the Help to Buy Shared Ownership scheme will only be eligible to pay stamp duty, if any at all, for the share they are buying. So, a buyer paying £125,000 for a 25 per cent share of a new home valued at £500,000 will not pay stamp duty.

Other stamp duty rates remain the same.

PURCHASE PRICE

STAMP DUTY RATE ON FIRST PROPERTY (1)

Up to £300,000

0%

£300,000.01 – £500,000

5%

What does this mean for people on £50K per annum salaries?

Previously, if you earned £46,350 per annum and above, you’d fall in to the higher rate tax payer threshold – you’d be taxed 40%

This has now been increased to £50,000 per annum – April 2019

What does this mean for the cost of travel?

No major changes have been made here.

Costs generally remain the same.

However there has been an introduction of a new rail card for 26-30 year olds providing 1/3 off most rail travel. This will be made available nationally by the end of the year.

Brexit? What happens now?

This is something that I will not dabble too deep in. After all, our Schools, Higher Education facilities and Government have barely wrapped their heads around this.

However, from the budget, it is clear that a lot of money is being pumped in to various regions to help supplement the immediate defects of suggesting and eventually leaving the European Union, however this is a grey area as we haven’t even established 1. Whether we’ll have a no deal Brexit 2. Whether we’ll have a Brexit deal 3. Whether there’ll be another referendum resulting in no Brexit at all.

The point I want to make here is the importance of understanding the political process and what your vote means. Keep your eyes peeled, ears open and remain attentive along the Brexit journey so that you know how the progress or lack of it, will affect you.

Read Newspapers, watch/listen to the news, question time and have a little fun with the internet -Ultimately, stay informed.

LISA: The Lifetime ISA

What is the LISA?

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ISA

This is an Individual Savings Account you can use to buy your first home or save for later life, like retirement.

You have a limit of £4,000 that you can put in each financial year until you are 50.

When you are 50, you will not be able to pay into your LISA or earn any bonus, however your account will stay open and you will earn interest on your savings.

Your annual ISA limit is £20,000, so the cap of the £4,000 LISA limit counts towards your annual ISA limit. Bare in mind that you are only allowed to open one ISA per tax year, so you lose out on £16,000 worth of tax free savings.

Back to the LISA. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.

Terms and Conditions:

  • You must be 18 or over and under 40 to open a Lifetime ISA
  • You will be charged 25% if you withdraw money from your ISA for any reason other than:
  1. To buy your first home
  2. At aged 60 or over
  3. If you’re terminally ill, with less than 12 months to live

The withdrawal fee is to recover any Government bonus, essentially withdrawing money for any other reason than the above will result in you receiving less money than you paid in.

  • For first time buyers, the price of the property has to be £450,000 or less and you must use a solicitor or conveyancer to act on your behalf as the LISA provider has to transfer the funds directly to them.

 

Over the last few weeks, we’ve explored the various schemes available for First-time buyers/Home movers with the Governments assistance. If you’ve missed out, or have just joined us, feel free to catch up on the posts here:

 

 

Photo credit: homesandproperty.co.uk via Google search.

Help to Buy: Equity Loan

Help to Buy

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In this month of October, we have been solely talking about the various Help to Buy schemes available.

The Help to Buy initiative was a way of assisting young first-time buyers acquire their first home. At a time where it almost seemed impossible for the millennial to own a property in the ever changing and increasing property market, the government stepped in to lend a hand.

However, there is a catch. Nothing in life is free and that’s why it is important to know the pros and cons of any scheme you commit to.

These scheme consist of the following:

Help to Buy ISA

Lifetime ISA Post due 29th October

Equity Loan

Shared Ownership

Mortgage Guarantee Scheme Withdrawn November 2016

 

What is a Help to Buy Equity Loan?

 

The Government lends you up to 20% of the cost of your newly built home, so you’ll only need a 5% cash deposit and a 75% mortgage to make up the rest.

This scheme is available to First-time buyers and Home movers.

For example:

Purchase price: £200,000

Your contribution to the deposit: £10,000

The Governments contribution to the deposit: £40,000

Mortgage Amount: £150,000 75% LTV

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You won’t be charged loan fees or interest on the 20% loan for the first five years of owning your home, however you will have to pay £12 management fees each year.

After 5 years, you will have to start paying back the 20% you initially borrowed, plus interest and your monthly Mortgage payments

ALERT

Things to bare in mind:

  1. Interest kicks in after five years, and could amount to a chunky sum over time.
  2. The Government will take the same percentage of the sale price as you opted for when you took out your equity loan (regardless of how much the loan was originally for) when the property is sold.
  3. You can repay part or all of the loan early, but the Government will only accept this if it’s a minimum of 10% of the property’s current value.

Help to Buy: ISA

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A Help to Buy ISA is something all First Time Buyers can benefit from. Whether you decide to use a Government Scheme or go the Standard Mortgage route, you can maximise your savings.

The Help to Buy ISA was an initiative the former Chancellor George Osborne and the Government set up to help First Time Buyers get on the property ladder in December 2015, however the scheme will be closed to new savers on the 30th November 2019.

You will only receive the Government bonus when you are close to completing on the purchase of your property.

The great thing is that a H2B ISA isn’t a per household account, but a per person account. So essentially, you and your partner can get a bonus as little as £600 or as high as £6,000

How much bonus will you get from the Government?

Savings below £1,600 = £0 from the Government as the funds are insufficient

Savings between £1,600 and £12,000 = A 25% top up from the Government

Savings over £12,000 = A £3,000 top up from the Government

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How it works:

  1. You open your Help to Buy ISA
  1. Make an initial deposit of £1,2000 and the maximum of £200 per month there after.
  2. Continue saving. Build up a strong balance
  1. Find a property in your price range, make an Offer and go through the Home buying process
  1. When you are close to completing on your purchase, your solicitor will apply for your Government bonus.

Things to consider

It’s important to note that there have been many occasions where the bonus is not paid to the applicants until after completion has taken place.

Yes, they got the money and wasn’t scammed out of the scheme, however, the bonus funds couldn’t be used towards the deposit.

If you don’t particularly need the bonus to make up your deposit, this is great as you’ll have funds available to kit out your new home and buy some very needed furniture, accessories and electronics after completion.

The downside is that if you had calculated the bonus in to the mandatory deposit amount which is quite time sensitive in acquiring around exchange etc, then you can find yourself in a bit of a pickle.

Your maximum ISA allowance per tax year is £20,000 – this includes a standard Cash ISA, Lifetime ISA and Help to Buy ISA*

*You cannot get a first-time buyers bonus on both the Help to Buy ISA and Lifetime ISA

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What to do?

If you’re a First Time Buyer, I’d 100% say to open a Help to Buy ISA NOW even if you have no desire to get on to the property ladder any time soon

Don’t depend on the ISA to complete/make up your deposit

See the Help to Buy ISA as a post completion fund. A fund to kit out your new home and cover any post completion unexpected expenses.

Stamp Duty: The Perks of being a First Time Buyer

Before you commit to buying your first home, stop, think and calculate!

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The flat you can buy today on your current budget, equates to a house in a few years of patient saving.

As soon as you use your First Time Buyer rights, that’s it, they’re gone. Any property you buy thereafter will fall victim to *higher Stamp Duty rates.

After the Autumn 2017 Budget, it was announced that First Time buyers will not have to pay stamp duty for the first £300,000 of their purchase and £5,000 less on a purchase between £300,000 and £500,000.

The image below shows a representative example of how Stamp duty is calculated for a £500,000 property:

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Any property over £500,000 is not eligible for Stamp Duty relief. So a £600,000 property would be subject to a hefty £20,000 stamp duty bill.

If you decide to buy a second home or a Buy-to-Let property, you will also have to pay an extra 3% stamp duty on top of the current rates for each band.

Below is a table for *standard Stamp Duty bands:

Minimum property purchase price

Maximum property purchase price

Stamp Duty rate (only applies only to the part of the property price falling within each band)

£0

£125,000

0%

£125,001

£250,000

2%

£250,001

£925,000

5%

£925,001

£1.5 million

10%

Over £1.5 million

12%

Patience is indeed key here.

Moving slightly away from stamp duty, as a first-time buyer there are also preferential Mortgage rates and products for you. Combining these deals with your discounted stamp duty, you are making a whopping saving as a first time buyer and shouldn’t let anxiety or this competitive nature that many millennial’s have distract you from your goal and ultimate saving opportunity.

Think about longevity, don’t live in the now.

Why buy an “okay” flat now for £150,000 (that you only intend to live in for 3 years) and waste your stamp duty discount, when you can buy a £300,000 property that you are much happier with in 2 years time a live a foreseeable future in?

Stop, think and calculate.

Selling your property

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Home Mover

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Selling your property can be basic, however with so many different schemes and second charges, there are multiple factors to consider.

Today we are going to focus on a basic sale.

You are either:

  1. A home Mover
  2. Deciding to sell and rent going forward/move in with family.

“I’m not too sure about when, but I know that I want to sell my property this year”.

“I’ve got my eyes on a property, I’m ready to make an Offer, but I haven’t even put my property on the market yet”.

“I want to move, but I haven’t got my eyes on a property just yet, they’re just not ticking all of the boxes”.

My answer to all of the above is to get in touch with the local Estate Agency’s in your area and put your property up for sale.

Once it’s up, you can always take it down if you change your mind. The longer you procrastinate doing nothing, no one is viewing your property, no one knows you’re considering selling up and once you see a property you are interested in and tight deadlines follow, you’ll be anxious and overwhelmed with the process.

STEP 1: Contact local agents and explain your situation

STEP 2: Get them round to view your property and give you a rough idea of what your property is worth, what properties in your area have been sold for of late

STEP 3: Understand the agents charge policy. Some charge 1% of the sale price, other 0.5%, 0.25% etc and there are a variety of packages including pictures, Zoopla listings etc that you need to be aware of

STEP 4: Solicitor – find one. Just like with a purchase, you’ll need a solicitor to act on your behalf. They will liaise with the buyers solicitors to arrange particulars of the contracts, exchange and completion dates.

STEP 5: Funds – Once the sale is done and monies are received, your solicitor will pay off your existing Mortgage and the excess will be yours.

STEP 6: Buying a new home – The excess funds will be used as a deposit towards your new home. That’s why it’s important to sell and buy simultaneously.

OR

STEP 6: Renting/Moving in with family – The excess funds will be wired to the account of your chance savings, current, bond etc.

FAQ’s

What about Tax?

Private Residence Relief. You don’t pay Capital Gains Tax when you sell (or ‘dispose of’) your home if all of the following apply: you have one home and you’ve lived in it as your main home for all the time you’ve owned it. you haven’t let part of it out – this doesn’t include having a single lodger.

What if I bought my house under a government scheme or have a second charge in place?

Consult a solicitor. One that specialities in properties sold under your scheme/second charges before you put it up for sale. You need to understand the process, legalities and personal cost to you.

ERC’s | Early Repayment Charges

The In’s and Outs of Early Repayment Charges

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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.