BTL remortgage costs: a guide for landlords

By Ben Gosling of www.commercialtrust.co.uk

Switching your buy to let mortgage can be a good way to cut down on running costs and plan for the future – but remember to take the cost of remortgaging into account.

Remortgage activity was the primary driver of buy to let lending in the second quarter of 2015 [1], and between the landlord tax announcements in the July Budget and renewed talk of interest rate rises, Q3 could well see yet more landlords switching their loans.

If you are planning to refinance your property, it pays to know what sort of costs you may encounter so that you can budget ahead of time.

Costs from your current lender

Early repayment charge

The majority of products are subject to early repayment charges during the initial deal period, which is typically between two and five years. Early repayment charges (ERCs) are usually a percentage of the amount repaid.

You should therefore be wary of switching mortgage during an ERC period, as the charges will be levied on the full outstanding loan amount.

Exit fee

Some buy to let lenders also charge exit fees (sometimes called ‘discharge fees’, ‘mortgage fees’ or ‘redemption fees’) for repaying the loan in full before the end of the mortgage term, including when you switch mortgage – though an exit fee may not be levied if you stick with the same lender.

This fee is typically a fixed amount between £50 and £300.

Fees for switching before a mortgage completes

A further switching fee may be charged if you change deals prior to the completion date for a mortgage you’ve already applied for. In addition, you might lose any other fees you’ve paid up to that point – so be mindful that you are applying for the right deal!

Costs from your new lender

There are several different types of fee that a lender might charge for a new buy to let mortgage loan. Not all lenders will charge all of these fees, many of the terms can be used interchangeably and they can often be rolled up together.

However, your mortgage advisor should always provide you with a detailed breakdown of what you need to pay, how, and when.

Application fee

This fee is charged, as the name suggests, upon application, and is usually non-refundable. It might also be called a ‘booking fee’, and is charged for reserving your chosen product whilst your lender processes your application.

Insurance administration fee

If you choose to take out landlords building and contents cover with an insurance provider other than your lender (or a provider chosen by your lender), you may be charged for the cost your lender incurs in checking that the cover is appropriate.

This might also be called a ‘freedom of agency fee’, an ‘own building insurance fee’, an ‘insurance contingency fee’ or many more besides – but you should always be told what the fee is and why you are being charged it.

Legal fees

Your lender will usually charge you fees to cover the cost of instructing their own conveyancing solicitors. There is typically far less legal work involved in a remortgage than a purchase, and the legal fees are therefore likely to be lower. Your lender might even offer free basic legal fees as an incentive.

Mortgage account fee

A fee for setting up and maintaining a mortgage account, an account fee is usually non-refundable and added to either the up-front costs or the loan principal, at your lender’s discretion.

Product fee

This is usually the main fee advertised by the lender, and can either be a set amount or a percentage of the loan. Some buy to let mortgages are advertised as ‘fee free’ – this usually means that they have a product fee of zero.

You might see product fees referred to as ‘arrangement fees’ or ‘admin fees’, as they essentially reflect the cost of processing the mortgage application. They could also be called ‘completion fees’.

Lenders will often allow you to add this fee to the loan amount (subject to affordability, loan-to-value, rental cover and other applicable criteria). Bear in mind that if you do this, you will need to pay interest on the fee amount, which will increase the cost of your mortgage in the long term.

Transfer fee

This fee covers the cost of the telegraphic transfer of funds from your lender to your solicitor, and may be charged by either party if it is charged at all.

Valuation fee

Usually charged on a sliding scale relative to the value of your property, these fees cover the cost of the property valuation. They are usually payable up-front and are only refundable if the valuation does not go ahead.

Many lenders offer free or reduced valuation incentives to remortgage customers. This is usually subject to a maximum amount.

Broker fee

If you have sourced your new mortgage through an intermediary, such as a buy to let mortgage broker, a broker fee may also be payable.

This fee reflects the work undertaken in matching you to an appropriate mortgage and packaging the deal for the lender in order to give you the best chance of acceptance.

 

References

  1. “House purchase lending up 22% in June”. CML. 11 Aug 2015.

This article is intended for information purposes only and should not be taken as advice.

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Investing in buy-to-let as a business

By Ben Gosling of commercialtrust.co.uk

Most landlords are in agreement that buy-to-let is a business, but how many have considered entering the market as a business? Read about the pros and cons of setting up a limited company to invest in property.

There are many ways to invest in buy-to-let property. Many landlords choose to do so as private individuals, meaning that their name is on the deed and the rental contract, the rent goes directly to them and is subject to income tax.

It is possible, however, to set up a limited company to invest in property. Under this arrangement the company’s name goes on the documentation, whilst the landlord is named as a company director. Rental income goes into the company and is subject to corporation tax, rather than income tax.

Recent events might make this strategy more appealing to certain landlords, particularly those on higher tax bands. In his 8 July budget speech, Chancellor George Osborne announced that full tax relief for buy-to-let mortgage interest would be withdrawn over four years, starting in April 2017, and replaced with a 20% basic rate reduction 1. Experts suggest that, as a result, some landlords could pay more in tax than they make in profit 2.

Pros of incorporating a business

Corporation tax: Transferring one or more of your properties into a limited company, or ‘incorporating a business’, can have some tax advantages if planned carefully. Because companies pay corporation tax and not income tax, full finance relief can be applied and only profits are taxed. This means that tax goes up or down in line with net income.

Corporation tax rates are also being lowered during the same period that buy-to-let mortgage interest relief is being phased out. By 2020, corporation tax will be just 18% (down from 20% now) – compared to 40% for higher-rate taxpayers, and 45% for additional-rate taxpayers.

Interest rates are likely to be higher by 2020. Professional analysis suggests that a private investor with an £85,000 mortgage against a £100,000 property, paying 5% per month in interest and being taxed at the higher rate, would effectively pay more than 100% in tax. A company, meanwhile, could pay less than half of this amount. (Source: PwC 3.)

Dividends: When running a property business through a company, rental income goes to the company rather than the director. This means that you can take out as much or as little income as you need for yourself, and have more control over how it is taxed.

The tax treatment of dividends has changed slightly: the rates are being raised, and basic-rate taxpayers are no longer exempt. Taking money from your company also means that it is, in effect, taxed twice. However, it is still possible that this setup may be more efficient than paying income tax after the changeover.

Other taxes: Rental properties are excluded from the higher rate of stamp duty land tax (SDLT) imposed on incorporated property purchases worth £500,000 or more. This means that a property company benefits from the new progressive structure that has lowered SDLT payable for the majority of property purchasers.

Incorporation also makes change of ownership easier. By switching directors or transferring shares, you can effectively gift your property to someone without the owner (the company) changing, meaning that the transfer can be exempt from capital gains tax (CGT). Bear in mind that gifting assets in this way can still generate inheritance tax exposure, so be sure to seek advice from a qualified tax accountant.

Growing a portfolio: If you wish to use your profits to invest in more property and grow your portfolio, you can retain it within the company without having to pay income tax. Using a company structure, you can have as many or as few properties as you wish under a single corporate umbrella. This can reduce both administration and taxation costs and allow you to grow your portfolio more quickly.

Cons of incorporating a business

Financing: Though we might see this change in the future if limited companies become a more popular investment route, less than half of the buy-to-let lenders in the marketplace cater for corporate borrowers at present. This typically means that interest rates and product fees are likely to be higher than for private individuals borrowing under comparable circumstances.

Restrictions: Concordantly, lenders often impose a number of restrictions on limited company borrowers. In all cases, companies must be set up as special purpose vehicles (SPVs) which are solely for the purchase, sale, rental and/or management of real estate. Lenders frequently insist that directors are UK-based and are also company shareholders, and often underwrite directors and shareholders individually.

Tax: We’ve discussed several positives on the tax front, but there are negatives to counter it.

Because stamp duty land tax (SDLT) is payable when property is transferred to a company, properties purchased prior to incorporation may be subject to a double tax. This is also likely to be charged on the property’s full market value 4.

Also note that corporation tax is not subject to your personal allowance. Typically, the higher your personal income – both from property and elsewhere – the more tax-efficient borrowing as a limited company is likely to be.

Conclusion

Ultimately, whilst a company might give you more certainty as to how much tax you are paying each year, it may still not be the best option. Be sure to discuss your options with a qualified accountant or financial advisor before planning your next move.

 

References

  1. HM Treasury (2015) Summer Budget 2015. Available at gov.uk (Accessed: 17 Jul 2015)
  2. Haslett, E. “July Budget 2015 – changes to mortgage tax relief: Here’s what to do now if you’re a buy-to-let landlord”. City A.M. 8 Jul 2015
  3. White, A. “Buy-to-let: How landlords can cut their shock new tax bill”. The Telegraph. 10 Jul 2015.
  4. “Stamp duty land tax: transfer ownership of land or property”. HMRC. 13 Jan 2014.

This article is intended for information purposes only and should not be construed as providing investment advice.

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Pros and cons of a high LTV buy to let mortgage

By Ben Gosling of www.commercialtrust.co.uk

The average loan to value (LTV) of a buy to let investment – the ratio between the loan size and the value of the property – tends to sit between 60 and 70%. But some landlords opt for 75%, 80% or even 85% LTV when taking out a new loan.

Here, we look at why someone might want a high LTV mortgage, as well as the pros and cons of opting for this potentially riskier option.

‘Gearing’

First, it might be handy to bust a little jargon.

‘Gearing’ – sometimes known as ‘leverage’ – is a term used in finance, and is another way of referring to the ratio of debt to capital. When investing money, it is important to make it work as hard as possible, and gearing can allow investors to achieve far higher returns by minimising the start-up cash needed.

A very simple example: imagine you purchased a £100,000 property using a £15,000 deposit, and then in three years’ time sold it for £115,000.

Assuming that the rent covered the operating costs throughout the three year period, your profit (after repaying the £85,000 mortgage) would be £15,000, meaning that you’d have doubled your initial outlay. Though the asset itself would only have appreciated by 15%, the return on your original investment would be 100% – more than six times the asset growth alone.

The pros of a high-LTV BTL mortgage

Low entry cost

One of the biggest barriers to property investment (and ownership) is the cost. Many novice or first-time landlords don’t have access to the capital required to put down a large deposit.

The immediately obvious benefit of a high-LTV buy to let loan is that it permits entry into the market at very low outlays. Subject to minimum property values, some landlords might be able to invest in a property with a deposit as low as £10,000 1.

Inflation

Property is often treated as a medium to long-term investment because, over time, house prices trend upwards. This means that, assuming it stays level, the relative size of your mortgage debt should gradually shrink.

So what starts out as an 85% LTV loan on day one might, after five years of steady price increases, become a 65–70% LTV loan. After 10 years, the LTV could be as low as one half.

Price inflation isn’t guaranteed, but the longer-term your investment, the more likely it is that your initial encumbrance will slowly shrink entirely on its own.

Spreading risk and returns

We already touched on boosting returns in the introduction to gearing. By using a larger loan to leverage your capital, it is possible to increase the return on your investment.

£54,000 could be used as a 45% deposit on a single property worth £120,000. By splitting this into three 15% deposits of £18,000 instead, you could purchase two more properties of a similar quality, and potentially triple the return on your initial outlay.

This also helps to spread certain investment risks: in a single property, rental arrears or voids effectively cut off your only line of income. If you had two more properties, then your income would only be down by a third.

The cons of a high-LTV BTL mortgage

Reducing your cash flow

Though it is possible to boost your return on investment with a smaller deposit, your cash flow is likely to take a hit.

A larger and (probably) pricier mortgage will accrue more interest. So whilst your initial outlay might be working harder, your overheads will be higher, and you will have less working cash flow month-on-month to reinvest in your property, set aside for emergencies, or simply put into your pocket.

The flip side of this is a reduced tax bill. Buy to let mortgage interest can be offset against rental income when calculating income tax; thus, the more interest you pay, the lower your tax liability.

Less equity

The way many landlords build buy to let ‘empires’ is by regularly releasing equity from their existing portfolio to fund new purchases. Of course, this strategy is dependent on their being enough equity in their properties to do so.

Even if you can release enough to fund a new purchase and remain within your lender’s LTV limits, your rent might not be enough to cover the new repayments by the required amount (usually 120–130%).

This makes a highly-geared portfolio more difficult to expand without finding cash elsewhere.

Added risk

Higher LTVs are naturally riskier. This is why lenders tend to charge higher rates and fees for higher LTV mortgages.

Though property values trend upwards, they can also fall, particularly in the short term. During last decade’s financial crisis, average values fell by around 15% 2– meaning that anyone with less than 15% equity in their property was at serious risk of falling into negative equity and being unable to sell without losing money.

There is also the fact that higher overheads means less cash for your contingency fund, meaning that you might need to pay for repairs or other emergencies out of your own pocket.

Conclusion

Ultimately, whether or not a high LTV loan is the right choice for you comes down to a number of factors.

If you are risk averse or after short-term returns, then a larger deposit might be necessary. On the other hand, if you are comfortable with the higher risk levels and happy to wait for longer to see your returns, then a higher LTV loan might be for you; similarly, it can be a good leg-up onto the ladder for budding landlords without a lot of capital to invest.

Every investor is different, as is every investment, and finding a strategy that works for you is one of the most important developments in your early career as a landlord.

 

References

  1. “Buy to let mortgage deposit requirements”. Commercial Trust. N.d. Accessed 12 Jun 2015.
  2. Based on house price index data for Nov 2007 to Apr 2009 retrieved from http://landregistry.data.gov.uk/app/hpi

This article is intended for information purposes only and should not be construed as providing investment advice.

Your property may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.

The FCA does not regulate most forms of buy to let mortgage.

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What next for UK landlords?

By Ben Gosling of Commercial Trust Ltd

By Ben Gosling of Commercial Trust

By Ben Gosling of Commercial Trust

Now that the election has passed and the course is set for five years under an unexpected Conservative majority, landlords will be turning their attention to the future.

Buyer reticence affected some areas of the housing market in the run-up to the election. Prime Central London property was hit particularly hard, with average values falling by 8%, or nearly £140,000 – a recession-beating slump that has been blamed on Labour’s proposals to impose a 1% tax on properties worth in excess of £2 million if they got into office [1].

Labour had also adopted a controversially interventionist stance on the rental market, proposing three-year tenancies and inflation-capped rents. Critics said that the policies would hurt the supply of rented homes by discouraging investment; and indeed, after a strong 2014, gross buy-to-let lending appeared to peter out during the early months of this year [2]. This could be because prospective investors were fearful of the impact that a Labour government might have had on their business.

Is another property boom round the corner?

With the so-called ‘mansion tax’ dead and buried for at least five years, along with Labour’s headline pledge to remove the non-domiciled tax status, investment in expensive property – particularly from overseas – is expected to pick up [3].

The other end of the market is likely to see a pickup in activity too. The Conservatives have promised to keep interest rates low (despite monetary policy lying outside the Treasury’s direct remit [4]) and to top-up first-time buyers’ savings through the Help to Buy ISA. The extra 200,000 homes they have promised over the next five years do not meet the UK’s housing supply requirements, however, and critics believe that Tory policy does too little to abrogate barriers in planning and infrastructure [5].

Unless the government can make real improvements to the supply of housing, the demand-boosting measures they have promised to implement will see values soar over the next five years.

What does this mean for landlords?

Rising capital values are good news for landlords, but with house prices rising faster than rents, yields are likely to be squeezed in many areas, reducing operating income in the short to medium term.

Housing markets outside London and the South East were slower to pick up following the recession, but data analysis suggests that for both yield and capital values, most of the best spots are well outside the capital and surrounding areas.

The city of York was the number one location for capital growth over the last twelve months. Of the top ten locations, only three – Guildford, Woking and Kensington and Chelsea – are situated in London or the South East. In the coming months, values in the commuter belt are expected to rise more slowly than elsewhere in the country.

Meanwhile, Greenwich in London is the top location for rental yield. But landlords hoping for healthy cash flow who are priced out of the capital might consider the four runners-up: Peterborough (East Midlands), Newcastle (North East), Leeds (Yorkshire) or Salford (North West) [6].

 

References

  1. Boyce, L. “Election jitters wiped a staggering £140k off prime London homes in just three months with swanky apartments hardest hit”. This is Money. 14 May 2015.
  2. “Buy-to-let gross advances [XLS]”. Council of Mortgage Lenders. Retrieved on 15 May 2015 from www.cml.org.uk
  3. Clements, L. “Election 2015: House price boom ahead”. The Express. 8 May 2015.
  4. “Can the government really keep interest rates low?” Economic Voice. 17 Mar 2015.
  5. O’Loughlin, D. “Concerns raised on Tories tackling property supply”. FT Adviser. 11 May 2015.
  6. Clements, L. “Britain’s top 10 buy-to-let hotspots”. The Express. 13 May 2015.

This article is intended for information purposes only and should not be construed as providing investment advice.

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What to expect when taking out a BTL mortgage

By Ben Gosling of commercialtrust.co.uk

For almost twenty years, people hoping to borrow money in order to be able to invest in rental property have been able to do so with the use of a buy-to-let mortgage.

But it is not just professional property investors who do it, nor even keen amateurs and first-timers with their eyes on building up a portfolio; many landlords are actually forced by circumstance into letting out their home. Because of the wide range of borrowers that buy-to-let attracts, certain areas of the market require more consumer safeguards.

Therefore, if you are investing in buy-to-let, it is important to know what to expect – particularly with the approach of new pan-European legislation, known as the Mortgage Credit Directive, that will have pronounced effects on the way the UK mortgage market is run.

Types of buy-to-let borrower

There are currently two types of buy-to-let borrower: unregulated and regulated. The latter group fall under the remit of the Financial Conduct Authority (FCA), which also oversees mortgage sales to owner-occupiers. The vast majority of buy-to-let business is not currently regulated 1.

Under the current rules, a buy-to-let mortgage will need to be regulated if:

–        The borrower intends to occupy two fifths or more of the property for their own use;

or

–        The property will be let to a close relative of the borrower – either a spouse or partner, parent, grandparent, sibling, child or grandchild 2

When Part 3 of the Mortgage Credit Directive Order 2015 comes into force on 21 March 2016 3, a third type of buy-to-let borrower will exist, known as buy-to-let ‘consumers’. Consumers are borrowers who are not considered to be letting out a property “wholly or predominantly” for business purposes, such as those who decide or are forced to rent out their home in order to relocate or because they are unable to sell, or those who rent out an inherited property. In the industry, borrowers such as this are often referred to as ‘accidental landlords’.

As such, from 21 March 2016, all new buy-to-let lending will fit into one of the following three types:

  1. Mortgages that are regulated because the borrower will partly occupy the property or will be letting it to at least one immediate family member
  2. Mortgages that are regulated because the borrower will be considered a consumer not acting in the course of a business
  3. Mortgages that are not regulated because the borrower will be considered to be acting in the course of a business

What does it mean if you take out a regulated mortgage?

Mortgage regulation is intended to offer borrowers more protection from misselling, ensure that they receive the most appropriate product for their circumstances, and provide guidelines for how they are treated throughout the mortgage term with regards to issues such as payment arrears and complaints.

It also means that their application will be subject to more stringent suitability checks. The borrower may have to undergo affordability checks that they otherwise would not with an unregulated mortgage and the amount they can borrow may be affected by their income. For this reason, many buy-to-let investors prefer to take out unregulated loans, which can be assessed on the strength of the potential rental income of the property being purchased.

When the Mortgage Credit Directive comes into force next year, some borrowers will essentially be able to ‘opt-out’ of regulation by declaring that they are acting wholly or predominantly in the interests of a business venture. Unless the person granting the mortgage has reasonable cause to suspect that this is not the case, the borrower will not be considered a consumer, and will be able to apply for an unregulated mortgage 4.

What does it mean if you take out an unregulated mortgage?

Borrowers who take out a mortgage for business purposes are generally considered to be more risk-aware than consumers, and as such, the protections and remedies that are afforded to all regulated borrowers are not always extended to unregulated borrowers. This means that, if you take out an unregulated mortgage, you may have fewer options for redress in the event that the product proves to be unsuitable, and your lender may be less lenient with things like payment arrears.

However, a number of buy-to-let lenders currently employ checks that are reminiscent of those carried out by lenders of regulated mortgages. This is particularly the case with first-time or otherwise inexperienced landlords, who may have to prove that they earn a certain amount in addition to the rental income that the property can fetch, in addition to other safeguards.

Furthermore, the Council of Mortgage Lenders has also recently released a ‘statement of practice’ which, as of 7 April, had been adopted by approximately 9 out of 10 buy-to-let lenders 5. This will apply to unregulated buy-to-let lending and outlines best practice regarding the handling of applications and the information given to customers, affordability checks, complaints and financial difficulty, among other things.

So even if you are taking out an unregulated mortgage, your chosen lender should hopefully still aim to provide objective advice and recommend the most appropriate product. For the avoidance of doubt, though, consider only approaching a lender or broker who follows FCA guidelines when recommending buy-to-let mortgages, and be sure to know exactly what entering into a mortgage contract entails and what your responsibilities as a borrower will be.

 

References

  1. “Buy-to-let mortgages – implementing the Mortgage Credit Directive Order 2015”. FCA. Feb 2015.
  2. The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, art 61(3)(a)
  3. The Mortgage Credit Directive Order 2015, art 1(5)(c)
  4. The Mortgage Credit Directive Order 2015, Sch 1 para 4(22)
  5. “CML members adopt new statement of practice on buy-to-let mortgage lending”. CML. 7 April 2015.

Your home may be repossessed if you do not keep up repayments on a mortgage or another debt secured against it.

The FCA does not regulate most forms of buy-to-let mortgage

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Can you buy to let if you don’t own your own home?

By Ben Gosling of Commercial Trust

Whether by choice, through circumstance or because of a mixture of the two, nearly one third of households in the UK today are rented rather than owned outright 1.

By Ben Gosling of Commercial Trust

By Ben Gosling of Commercial Trust

This 8.3 million households includes individuals who, for one reason or another, have not yet bought a home to live in, but who wish to get on the property ladder another way—by buying property to let.

This might be because they live in a prohibitively expensive area (for instance London, where average prices for first-time buyers are nine times average earnings 2) but can afford to buy elsewhere; it might be because they have not decided where they want to put down roots; it might even be that they do live in a home, but it is in someone else’s name. Whatever the case, it is becoming more and more common for non-homeowners to consider becoming first-time landlords.

Mortgage availability

First things first: can you finance the purchase?

If you are buying to let for affordability reasons, it’s unlikely that you will be able to afford to pay for a property with cash, even in the least expensive areas of the UK. Therefore, you’ll likely need to apply for a buy-to-let mortgage.

The good news is that there are buy-to-let lenders out there who will lend to non-homeowners; however, the choice is limited, as many require that you have at least one buy-to-let mortgage or rental property. Therefore, as a first-time buyer and first-time landlord, you might face stricter criteria (such as minimum income, age and term restrictions, loan amount and rental cover) and miss out on the most competitive mortgage rates.

When it comes to switching loan for the first time, however, you might have more luck. After 12 or more months’ buy-to-let experience, a few more lenders will open their doors to you.

Other options

You might know an experienced landlord who is willing to make a joint buy-to-let application with you. If so, more options should be available to you.

If you go down the route of joint property ownership, you will need to decide whether you and your co-owner(s) will be joint tenants or tenants in common. If you wish to be able to own a differently sized share of the property that doesn’t automatically revert to the other mortgage holder(s) if you die, then the latter arrangement—tenants in common—is the best arrangement, as joint tenants have equal rights to the property and cannot pass on their ownership as they see fit.

Final tips

It should be said that, if you are buying far from where you currently live, you should strongly consider employing a letting agent to manage your property.

Many landlords use a letting agent to market their property and find tenants, and then take on the day-to-day management themselves. While it is possible to do this from afar, many landlords—particularly inexperienced ones—prefer to be able to get to their property quickly, so that they can conduct inspections or respond to emergencies.

The full agency management route is more expensive, but it gives you the knowledge that your property is in professional hands while you are away. Just be sure to instruct an agent who is accredited by the Association of Residential Letting Agents (ARLA) or a similar trade body.

Another temptation long-distance landlords face is to buy a property without inspecting or appraising it (known in the industry as buying ‘sight unseen’). There is not a single successful property investor who thinks this is a wise idea! Even the most detailed property survey cannot substitute your own gut assessment of such an important purchase. If you truly cannot get to the property to view it, then see if you can send a trusted third party in your stead.

Finally, when applying for finance for your first purchase, remember that non-homeowner lending is quite a niche area of the buy-to-let market. All landlords can benefit from the services of an experienced buy-to-let broker to help find them the right mortgage product, but this is doubly true for landlords who do not yet own their own property. The first step towards property ownership is a crucial one, and you should never be afraid to ask for expert help.

 

References

  1. “Home Ownership and Renting in England and Wales.” Office for National Statistics. 28 Jun 2013.
  2. First time buyer gross house price to earning ratios [XLS]. Nationwide. Retrieved from www.nationwide.co.uk

 

Your home may be repossessed if you do not keep up repayments on a mortgage or another debt secured against it.

The FCA does not regulate most forms of buy-to-let mortgage

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A property investor’s guide to buying in a subdued market

By Ben Gosling of commercialtrust.co.uk

The recent news that nearly three quarters of properties sold during the first month of 2015 went for less than asking price 1 might prompt the question: is this a buyer’s market?

The dip in price paid relative to price requested, which is far more pronounced than is typical for the season, certainly suggests that buyers are wielding more control. Other factors that indicate a buyer’s market include the average length of time that a property is on the market, which according to separate figures stands at 125 days 2.

This is only part of the story, however. The same figures show that average marketing periods have actually shrunk by 18 days since February 2014. In fact, the time taken to shift a property has been trending downwards for the last five years. So while properties are selling more cheaply than expected, they are also selling more quickly.

In short, buyers may have the upper hand, but a transaction is still a high-pressure scenario and there is the potential to make a mistake. A bargain is still not guaranteed, so to limit the likelihood of making a property purchase you’ll regret, bear the following tips in mind:

1: Research the area

Look at both local listings and local statistics for the area in which you wish to buy before making a decision. By way of example, let’s compare the national picture to that of London.

Asking prices in the capital have risen by 1.8% in the last month and 14.6% in the last 12 months, both of which are more than double the rise seen nationally. The median marketing time is 87 days in London, compared to 125 days nationally.

But London has also seen a 51% increase in supply, compared to 19% across the rest of the UK. The average marketing period has also increased by 20 days since last year, compared to the 18-day national dip.

When we look at sold prices, we get a fuller picture: prices in London took a 0.2% dip in January, compared to a 1.3% increase in England and Wales. The annual change was still higher (12.0% in London compared to 6.7% in England and Wales) 3, but the glut of supply and growing marketing time point to a possible price slump in the capital.

If this occurs, then London buyers could be in a better position than the figures initially suggest.

2: Research the purchase

A seller who has first listed their property several months ago and has reduced their asking price on more than one occasion is usually keener to sell than someone whose property has only just come onto the market. When a seller is more motivated, your bargaining position is strengthened, giving you more room to negotiate things like the listing price and what is included in the sale.

Of course, a new market entrant might also be attempting to affect a quick sale, so the time that has elapsed since the first listing is not the only measure of keenness. How the asking price compares to those of comparable local properties (particularly those marketed by the same estate agent) can also be a good indicator.

3: Don’t skimp on the checks

Desperate sellers are a common sight in a suppressed market, and it can be easy to forget the more traditional reasons one might be eager to offload a property such as overriding interests, planning restrictions and local factors and structural problems with the property itself.

–        Consider commissioning a homebuyer’s report for anything other than a new-build property, and consider a more detailed building or structural survey for older or more unique properties.

–        Make sure your solicitor conducts in-depth local searches to find any local factors that might affect the property’s use or value.

–        Consider paying for a Land Registry search on the property to confirm ownership, the size of the property’s boundaries and flood risk.

–        Visit it at different times of the day and night and ask around about the neighbours.

–        Research local crime statistics. The comprehensive crime maps provided by Police.UK allow you to map locally reported crimes by area, time period and type of crime, so you can find out not only how desirable (or not) a street is, but how frequent and persistent individual problems are.

4. Stick to your set price

You should already have run over the numbers and decided exactly how much you can afford. By sticking to this price you avoid getting caught up in potentially volatile (and expensive) bidding wars with other buyers keen to grab a bargain. The desire to win for winning’s sake shouldn’t override the desire to not break the bank, so keep a cool head and remember that there are other deals out there.

5. Have finance in place

If you want to be able to grab a bargain at the drop of a hat, it is best to have the behind-the-scenes processes – such as your finance application – in motion. It helps to know that you are submitting your case to a lender who is likely to accept it, so consider using a professional broker to place your deal more quickly, and try to obtain a decision in principle from a lender before you start making bids.

A decision in principle is non-binding, and is not the same as an official mortgage offer. It is, however, a good indication that a lender will proceed with your application should your property bid be successful.

References

  1. National Association of Estate Agents Housing Market Report: January 2015. NAEA. Retrieved on 2 Mar 2015.
  2. Asking Price Index: February 2015. Home.co.uk. 12 February 2015.
  3. http://landregistry.data.gov.uk/app/hpi/
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