As people find it harder to get a foot on the property ladder, the demand to rent houses and flats remains high. And so the flip side of the struggle faced by first-time buyers is the reward for buy-to-let property owners. But there is much more to becoming a landlord than collecting rent. Finding the right buy-to-let mortgage can make all the difference between financial burden or benefit.
Rise of the Rigsby
Buying a second property to provide rental income and/or an investment has never been more popular. According to figures from the Council of Mortgage Lenders (CML), the total number of outstanding buy-to-let mortgages rose by 48% last year to 408,300. This brings the total outstanding value of buy-to-let lending to an estimated £39 billion. Put in perspective though, buy-to-let business is still dwarfed by conventional mortgage lending, representing only 5% of the total mortgage market.
'Investors are still piling into the buy-to-let market,' says the CML's Michael Coogan. 'With lenders sticking to fairly conservative lending criteria, and continuing low levels of arrears, the buy-to-let sector looks sustainable and robust. Nevertheless, inexperienced potential landlords should tread carefully. Experienced landlords will take account of rental yields, property price expectations, anticipated void periods when property cannot be let, the impact of taxation, and maintenance costs. For novice landlords this is a complicated mix of factors to consider - people should only enter the buy-to-let sector if they intend to hold their property portfolio for some time. Buy-to-let is far from a one-way bet to make a quick buck,' Coogan explains.
Loans for landlords
During the second half of 2003, the average value of a new buy-to-let mortgage was £103,500. Most people buying property to let will need a specialist mortgage. These loans tend to require larger than usual deposits so expect to put down around 25% of the value of the property, rather than the usual 5-15%. Like their home-owning counterparts, many landlords also take advantage of g remortgaging opportunities and switch to better deals to save costs. But the added risks of buying property to rent out often attracts higher than average interest rates. Capped or fixed deals which ensure that payments do not rise beyond a certain amount each month are also popular with buy-to-let borrowers.
Shop around
You should shop around to find the deal which suits you, as lenders have different approaches to loans for landlords. Some will base the mortgage on your income in addition to the amount of rent they estimate can be obtained. Others will base the loan purely on the rental. The formula they use will also vary. Typically a lender will require the rent to be around 130% of the mortgage payment. This might mean, for example, that if your monthly mortgage interest payment were £500, you would need to demonstrate that the rental income would be 130% of that, or £650 per month. Others will offer a three times salary multiple and half the rental income. If you have substantial equity in your own home, you may be able to look at remortgaging this and so obtain the funds to take out a small buy-to-let mortgage.
Current best buys from independent advisers Charcol include a discounted offer from NatWest. The rate is set at 4.69% until the end of July 2006 when it switches to the buy-to-let variable rate of 6.54%. Standard Life's discounted loan offers a rate of 4.90% for three years and 5.84% thereafter.
Risk and reward
If you are new to the buy-to-let market, it is essential to take professional advice. In addition to choosing the right type of property in the right area, there are many risks and responsibilities which landlords face. There are also tax implications. Any interest you pay on a mortgage can be offset against tax, but capital payments cannot. This may impact on your choice of mortgage and obtaining independent advice is a must.
Get it right and the rewards can be substantial. Paragon Mortgages' January 2004 Buy-to-Let Index shows landlords earned total returns of over 20% in the year ended 31 December 2003, realising a return of £22,137 on an average property bought 12 months ago at £110,120. 'Landlords had a very good year in 2003 with their overall returns outstripping most other forms of investment,' says Paragon's John Heron. 'The average total return is over 20%, while in some regions it is significantly higher - 37% in the South West, 32% in the North West and 25% in the North and East Anglia,' he adds.
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