Introduction - In recent years, many more
properties are being purchased on a buy to let basis. In essence, a
building is purchased with the view to letting it out to a tenant in
return for a rental income. The landlord hopes that the rental yield will
cover his or her mortgage with enough left over perhaps for a small
taxable profit. Property is bought on a buy to let basis as an investment,
often as a wave of saving for ones retirement. Equities and pensions have
performed poorly in recent years and a buy to let is seen as an ideal way
of saving for one's future. On average a buy to let investor looks to hold
a property for a period of 17 years after which they will sell and as
house prices tend to rise, the equity value in the home should have risen
enough top provide the landlord's with a decent profit which can then be
used to help fund for retirement. A buy to let mortgage is a debt or charge,
secured against a rental property, the building or a piece of land. Buy to let mortgage financial products are sometimes known as Residential
Investment Loans. Landlord Mortgages can be obtained in the name of an
individual or individuals or in that name of a company or partnership. The
lender has security in the property, so that if the borrower cannot keep
up repayments under the terms set up with their mortgage, the lender can
repossess property, to sell it and obtain their money back.
Main Characteristics - the terms and conditions of a mortgage (or
debt) will require the mortgagee to repay their debts at a frequency
agreed at that outset. This is usually monthly and and frequency is stated
before contract is signed. The mortgage length is typically twenty-five
years. The longer the repayment period, the more interest on the loan is
usually charged. Interest charges are made by that lender in order to make
a return on the money that they are lending to the landlord. These
interest charges will vary from lender to lender.
Types - Landlords must choose between fixed,
variable, capped to flexible interest charges. With fixed rates interest
mortgages, the interest rate is fixed for a period of time and does not
alter. This enables the mortgagee to budget each month to know exactly
what the monthly repayment will be relative to rental income form the
tenants. After the fixed rate period of time is complete, often that
mortgagee is free to shop around and find a better deal � however
typically during the fixed period penalty charges for a re-mortgage
between lenders are levied. Typically once a fixed period has finished
cent penalty charges did not apply. The characteristics of landlord mortgages
are slightly different than those of an ordinary residential mortgage.
Firstly, the rate of interst is usually slightly higher (on average 0.5% to
1%) to reflect the increased perceived risk of letting tenants live in the
rental property. Secondly, when applying for a residential home loan the
landlord is usually expected to make a greater deposit commitment - the
size of the deposit is larger than a residential mortgage; typically as
much as 20% of the loan to value (LTV). For example, the deposit will be
�40k for an �160k mortgage on a property worth �200k.
Rentals Returns - Before the loan is approved in principle
the underwriter will expect to see that the rental income equals
approximately 130% of monthly mortgage (this figure varies according with
lenders). This figure provides a rough guide of the anticipated
profitability of the let and is therefore also calculated with taking in
account the average cost of repairs, maintenance and most importantly,
unplanned rental void periods. As house process have risen, the % is
increasing from 130% - 150% on average. In addition, the lender will
expect you use an accredited Association of Residential Agents letting
agent confirm the rental value in writing and also manage the property for
the first 6 - 12 months. The was set up in 1996 improve the quality and
number of private rental properties in the UK. This gives the lender more
confidence you are investing prudently.
Application Factors - other factors are also taken into
consideration by the lender when approving a landlord mortgage - such as
personal Income - is still assessed as measure of personal stability, from
an underwriting point of view, as a means of determining the proportion of
LTV and whether the candidate is stretching themselves if a long void
period occurred where the property is unoccupied between rent paying
tenants. Under some landlord lending loans, you have the scope buy more
than one investment property into a portfolio. Products like a �currency
mortgage� have recently been introduced for these high net worth
individuals. These products are managed in a way that borrows money at the
lowest possible interest rate amongst a suite of currencies. The Swiss
franc has become particularly popular due its long term stability and low
rate (relative to the US or far east.)
The popularity of landlord borrowing
products has reached a point where some south eastern geographic areas are
seen as highly risky in terms of the short to medium term return on
investment proportions. However, as the huge demand for rental
housing continues (driven by increased economic migration, more single and
divorced people living alone) the number of new properties being built
continues to lag far behind - this has sustained and increased overall
house prices by around a 8-10% growth rate in 2007.
Types of Tenant - before a landlord secures a residential
home loan on a potential property he should consider the type of tenant
that will be attracted to the type of property under consideration.
Visit local letting agents to see if the average rental income for certain
property types will adequately cover the monthly mortgage repayment costs.
location is also very important to maximise ROI - transport links for
commuter tenants will be an important consideration so plan and research
the local area before spending money on lender application fees, surveys,
solicitors fees etc.
