Docstoc

BUY TO LET MORTGAGE FINANCE

Document Sample
BUY TO LET MORTGAGE FINANCE Powered By Docstoc
					BUY TO LET MORTGAGE FINANCE
Introduction

This book has been designed to provide you with a basic knowledge of mortgages, in particular BTL
Mortgages.

What is a Residential Mortgage?
This is a loan that is secured against a home that you live in

What is a Buy to Let Mortgage?
This is a loan that is secured against a property you own that you let to tenants who will occupy the
property as their home

What is a Commercial Mortgage?
This is a loan that is secured against a business property that you own
Your own business may occupy the property or you may let the property to another business. It is also used
for those who run their property investing as a business

What is an Overseas Mortgage?
This is a loan that is secured against a property you own that is located in another country from where you
live



THE MORTGAGE PROCESS..........

   1. Find the right lender
   2. Apply for decision in principle
   3. Complete a full application to the lender
   4. Lender instructs a surveyor
   5. Lender requests required documents
   6. Documents provided to lender
   7. Surveyor prepares a property report and sends to lender
   8. Lender happy with received documents and survey report
   9. Lender issues legal mortgage offer outlining the terms of the loan
   10. Solicitor completes legal requirements, e.g. searches and reports on title
   11. Parties agree an exchange of contracts date
   12. Contracts exchanged and deposits paid (penalties for withdrawing at this stage)
   13. Completion date agreed with all parties
   14. Legal completion and property is now owned
   15. Solicitor arranges registration of new owner on title deeds
Ways to fund property investment purchases

Buy to Let Mortgages
Cash
Equity
Commercial loan
Bridging finance
Overseas Mortgage
Buy to let mortgages
Buy to Let Mortgages are the most common and favoured way to buy an investment property
The Buy to Let mortgage was specifically created for the residential investment market and is unique in that you are
given specific permission within your loan agreement to let the property.

The affordability for a residential mortgage on a property someone personally lives in is based on a multiple income
earned. In contrast to this, the affordability for a BTL mortgage is normally based on the anticipated rent exceeding the
mortgage payment by a margin, typically 25%.
Many lenders (but not all) now offer some sort of BTL mortgage. This competition in the market means there is still a
choice of rates, such as fixed rates and discounts, but these rates are typically a little higher than the rates for a main
residence.

Cash
Some are in the fortunate position to have access to cash for the whole of the purchase. However, borrowing part of
the money for the purchase can increase the net yield on the investment as interest payments can be offset against
the profit to reduce the tax bill.

Equity in an existing property
Many people start their property portfolio by raising equity from their own residence or other property. The interest
payments for any money raised this way that is used for property purchase can be set against the profit for tax
purposes whether it is used to fund just one purchase outright or as the deposit money for several purchases.

An ‘Offset’ mortgage is a particular type of residential mortgage that is ideally suited to help property investors fund a
purchase or deposits. In simple terms, a loan facility is agreed and secured on the residential home, but is available to
draw down in stages as required, and the borrower will only pay interest on the amounts as they are used.

Commercial Loan
Commercial loans are available and suited for commercial funding requirements such as shops, warehouses, offices
etc. and also have their place in the residential lettings market for mixed use property, large portfolio holders and
complex BTL requirements. Generally the downside of Commercial loans against BTL mortgages is more rigid
underwriting. Applicants for Commercial loans will normally need to provide full income proof, show experience in their
field and provide extensive financial documentation as well as meeting stricter requirements of the margin of rental
income above the loan payments.

Bridging finance
Bridging finance is a temporary short term finance used for a variety of reasons usually when loans are required
quickly and only required for a short term e.g. 1-12 months. It is used often by BTL purchasers to purchase property in
need of renovation before a mainstream BTL lender will consider lending. It is also used to secure property quickly, for
example, a mainstream BTL purchase will take typically 4-6 weeks to complete, however bridging finance could take a
little as a week.

Overseas Mortgages
Many property investors are also considering the potential of investing in property located outside of the UK. Spain
and France have always been popular with UK investors but new markets such as South Africa, Turkey and Eastern
Europe are also popular. Mortgages and the legal process vary greatly from country to country therefore Connect
have developed a unique product ‘Overseas Mortgage Professional’ which provides the mortgage adviser the
information and tools to advice in this market For more information visit
www.overseasmortgageprofessionalco.uk
What are the costs associated with a BTL mortgage?
Deposit
A minimum deposit of 15% of the purchase price will be required meaning a maximum loan size of 85% of the
properties purchase price. This would usually be referred to as 85% LTV (loan to value) With this there will be a
limited choice of competitive lenders but a higher deposit of say 25-40% (60-75% LTV) will open up more lenders to
choose from and potentially better rates

Buying a property at a discount to its true market value is often high on the agenda for property investors. Using
certain financial products it is sometimes possible to use the discount towards some or all of your deposit.

Survey Fee
It is a requirement of any Buy-to-let lender that the property is surveyed before they will approve the lending. The cost
will vary depending on the property’s value and lender chosen, but is typically around £350 for a £100000 property.
This would be for a general valuation for mortgage purposes only and although the borrower would normally get a
copy of the report, there would be limited comeback in the event of problems.

A survey called a homebuyers report should always be considered. Although up to twice the cost of the standard
survey, this provides more detail about the properties general condition for the purpose as well as the valuation for the
lender.

Mortgage lender fees
Generally all lenders have some sort of fee for arranging a mortgage. If this is structured as an arrangement fee, it is
usually payable on completion or can be added to the borrowing, if it is structured as a booking fee it is usually
payable upfront upon application, and watch as is sometimes non-refundable if the mortgage does not proceed.

Typical fees range from a few hundred pounds to up to 3.5% of the loan. Whatever the cost of the arrangement fee,
most lenders will allow the fee to be added to the mortgage so that it does not increase the initial capital outlay. This
will mean interest will be paid on this fee for the lifetime of the loan

Stamp duty

Stamp duty is payable via the solicitor on completion. The cost of this is 0% for purchase prices up to £125000, 1% of
the purchase price up to £250000, 3% for purchase prices £250001-£500000 and 4% for £500001 to £1000000 and
more again for higher values.

It’s worth noting that stamp duty is payable on the entire purchase price at the rate reached. For example a £255000
property will be subject to a 3% charge of £7650, however a property just £5000 less at £249999 will only be charged
at a 1% rate of £2499

Legal fees
Solicitors vary in the charges they make, however the bill from the solicitor will also include what is known as the
‘disbursements’ These disbursements include Land Registry fees, telegraphic transfer fees and search fees which will
be detailed on the solicitor’s quote. The amounts vary greatly depending on the purchase price and location of the
property

Broker fees
A broker fee is normally charged for the expertise in placing a mortgage with the most appropriate and competitive
lender. A broker can save their client time and money by searching through all the lenders in the market place and
advising you how each product differs with its rates and terms. A good broker will also deal with all the paperwork and
administration and liaise with all the associated professionals such as the solicitor and estate agent to help achieve a
smooth completion.
Buy to Let Considerations

Borrowing criteria
From the many lenders available, your choice of lenders will be determined by how well you match their criteria. For
example, some lenders have an age limit at the end of the mortgage of 65, where others are willing to go to age 85
and beyond. Some will allow first time buyers, and others will have expected an applicant to have held a residential
mortgage for at least a year. How long they have been employed or self employed and if they can prove income will
also have a bearing on the choice of lenders.

Once the lenders are narrowed down to match personal criteria, they then may need to be narrowed down further
depending on the property chosen. For example, some lenders require minimum property values, won’t lend to ex-
local authority property, only accept certain types of tenant etc.

Finally, the best rates and deals can be selected from the shortlisted available lenders.

Interest rates
There is the choice of various different interest rates. All lenders have a standard rate which is priced usually at a
margin above the Bank of England Base rate. As the Bank of England changes the base rate, lenders will increase or
decrease their standard rate to maintain their profit margin. The current Bank of England rate is 0.5%

To attract business, lenders will often forgo some of their profit margin in the early years of the mortgage and offer an
interest rate ‘deal’. The two main types are explained below:

Fixed: This means the lender will offer a fixed rate that will not increase or decrease during the fixed rate term, even if
there are changes to their standard rate. If market interest rates rise, borrowers will benefit from cheaper than average
payments or if interest rates fall, they may end up paying over the odds. However, they will at least have the security
of knowing exactly what the payments will be for a set time.

Trackers (and discounts): Often slightly cheaper than fixes, these rates will mean initially lower payments than the
average but will still go up and down with the movements in the market interest rates. Discounts are taken off the
lenders standard rate; trackers are a margin above or below the current Bank of England Base Rate.

Early repayment charges
Many mortgage deals come with early repayment charges if you pay the mortgage off early. It is important to consider
the impact of these charges against purchase strategy. For example if a property is being purchased to renovate and
sell on, it would be important to avoid early repayment charges (ERC’s) which can potentially run into thousands of
pounds and seriously impact on profit margins.

Early repayment charges usually only apply for the period of time you have taken an initial rate deal for example 2
years on a 2 year fixed rate. Watch out though for rates with an initial very attractive rate, but then have early
repayment charges extending beyond the initial deal, committing the loan to perhaps a less competitive standard rate.

Mortgage Term
The typical mortgage term is for 25 years. However the mortgage term will ultimately be dictated by a number of
factors. For an interest only mortgage the monthly payment will be exactly the same whether the term is for 5 years or
25 years, however with a repayment mortgage the monthly payment will increase the shorter the mortgage term.

Protecting a BTL portfolio
The only compulsory requirement set by the lenders is that the property must be insured against fire, theft and
subsidence. This plan can be taken with the lender or any provider in the market, however the lender may charge if
their plan is not used

Borrowers however should also consider a range of insurances. For example, for a small additional premium to the
property insurance, borrowers can protect their rental income if a tenant doesn’t pay.
They should also consider the impact of events such as death and ill-health. For example, if Ill-health caused financial
difficulty in meeting personal commitments such as loans, this could affect their credit rating and in turn restrict the
ability to raise further finance or renegotiate finance on the portfolio
Taxation

It is important to seek good advice from a qualified accountant, preferably one who has a good knowledge of property
taxation BEFORE proceeding with a mortgage. Implications such as whether a mortgage is done in joint or single
names cannot be undone very easily or without cost after the mortgage is in place.

There are 3 main types of tax to consider:

Income Tax: This is tax paid on the regular profit made from the property, such as the rent after deduction for all
costs. The Inland Revenue have produced a guide called the IR150 which explains all the allowable expenses to
offset against the rent. Where a property is mortgaged, only the cost of the interest can be offset. The choice of how to
repay a mortgage can affect how much income tax is paid. See the next section on mortgage repayment options for
more detail on how this works.

Captial Gains Tax: This tax is payable at 18% (basic rate) and 28% (higher rate) of the profits made when selling the
property. Each person has an allowance of £10600 (tax year 2012-2013) of profit that can be made before being
taxed. This allowance however cannot be carried forward if not used in one year and any profit made on selling other
assets such as shares, unit trusts etc in the same year will also be taken into account. It is worth noting that the profits
from buying and selling properties quickly such as renovation properties may be chargeable to income tax rather than
capital gains tax.

Inheritance Tax: Dependents, including non-married partners will have tax to pay on the value of an estate that
exceeds £325000 (tax year 2012-2013). This is automatically charged at the rate of 40%. Tax planning and effective
will planning can help minimise the effect of this on dependents.


Buying via a limited company
Taxation of a limited company is quite different to the tax for individuals. The tax is based on corporation tax and
different allowances and rates apply. Individuals should seek advice from their accountant as to whether a limited
company would be favourable, but it is likely that only certain types of individuals such as higher rate tax payers with
high yielding properties will be the ones to benefit. Finance for buying via a limited company is only currently offered
by a limited number of BTL lenders or Commercial lenders



PLEASE NOTE, we are not specialist taxation advisers. This information is provided for generic guidance
only.
Paying back what is borrowed

You have the choice of interest only or capital and interest (repayment) mortgages.

A repayment mortgage is where the lender is paid on a monthly basis a mixture of capital and interest from day one.
The amount of loan outstanding gradually diminishes over the mortgage term. A repayment mortgage is a guaranteed
way to ensure that the mortgage is paid off at the end of the term, providing each required monthly payment is met as
it falls due.

With a repayment mortgage, as the monthly payment is reducing the sum owed on the mortgage, the cost of interest
that is charged goes down each year and therefore year on year, less of the mortgage payment consists of the
interest element. However, it is only the interest element that can be used as a cost against tax so in the later years of
the mortgage property investors who have taken a repayment mortgage will subject to a higher tax cost


Example: Rent £750 per month, £100000 mortgage over 25 years at a rate of 6%


                                                  Year 1          Year 5         Year 10        Year 20
Total repayment mortgage                          £644            £644           £644           £644
monthly payment
Amount of this payment used                       £144            £194           £261           £475
towards repaying capital owed
Amount of this payment to pay the                 £500            £450           £383           £169
cost of the interest
Amount of ‘profit’ chargeable to                  £250            £300           £367           £581
tax (Rent less the cost of interest)

An interest-only mortgage is where the monthly payment to the lender consists only of the interest on the loan with
no element of ongoing repayment of capital. A savings vehicle such as an endowment or ISA could be used to provide
the final repayment. There is an element of risk to this type of repayment vehicle as it relies on a certain investment
return from the savings vehicle chosen. If this return is not reached then there could be a shortfall in repaying the
mortgage. Of course if the plan achieves a higher return it could provide a surplus or allow the mortgage to be paid off
earlier.

Many portfolio investors will select interest only without a specific repayment vehicle such as a savings plan. Often
investors will opt for a strategy to either hold the property indefinitely for retirement income or to sell one or more of
their properties at the end to repay the outstanding debt/s on the remaining properties.

For income generating portfolios, interest only can also have some tax advantages. An interest only mortgage will
have a monthly payment in the same example above of £500 per month consisting of all interest. Therefore even in
years 10 and 20, only £250 of rent would be potentially chargeable to tax. There are other costs such as agent’s fees
that can reduce the amount of income tax due. An accountant can help or more information can be found on the
Inland Revenue website: www.hmrc.gov.uk


PLEASE REMEMBER
If an interest only mortgage is taken for a lower monthly payment or tax advantages, the WHOLE mortgage
debt will still be outstanding at the end of the mortgage term.
Complex Property
From a mortgage point of view the following property can often involve more complex finance requirements:

        ·   Flats above shops or other commercial units
        ·   Low values (under £40000)
        ·   Ex Local Authority Flats
        ·   Semi commercial
        ·   Run down property and areas
        ·   Property in multiple occupancy (HMO)
        ·   Freehold property divided into self contained units.
        ·   Studio flats
        ·   New build property
        ·   Discounted property
        ·   Property in need of refurbishment
        ·   Developments
        ·   Auction purchases

We can help with further information on how to finance these types of property


Renovation
Many investors look to buy property that requires renovation to create additional capital growth. If there is cash
available the property could simply be purchased outright. Finance can then be arranged on the property by when the
renovations are complete.

Lettable condition
BTL mortgages are generally only available for properties that are in a ‘lettable’ condition. This means they will need
to have a kitchen, a bathroom, reasonable roof and windows etc. Even if the property is of a lower standard than you
would like, providing the lenders surveyor confirms it is ‘lettable’ you will able to arrange a BTL mortgage. The
surveyor may still recommend retention until certain works, often damp proofing, is carried out. It is worth noting that
the lender will only lend based on the value as it stands today, not the projected value after any work has been
completed.
Cosmetic refurbishments
Some lenders offer a scheme where the valuer will give 2 valuations, one on its current condition and one on the
anticipated value based on your schedule of works. When the work is complete, you can simply approach the lender
to check the work and release additional borrowing based on the increased value.
Alternative finance
However if the property is deemed in a currently 'unlettable' condition a BTL mortgage will not normally be an option.
Alternative schemes are available, but are slightly different from standard BTL mortgages. The main scheme used is
bridging finance which, which will cost between 1 and 2% per month.
Exchange and completion
Another alternative if the property is vacant is to complete the work in between exchange of contracts and the final
completion date. You will need to have the vendor’s permission to enter the property during this time and the lenders
surveyor will need to visit the property to check the work has been completed satisfactorily before they release the
loan.


Reviewing a portfolio
Further advances
If the property has increased in value, perhaps through refurbishment or general inflationary increase over time, it is
possible to go back to the existing lender and ask to borrow more money, called a ‘further advance’. A new survey will
normally be required to check the new value and the loan will still be restricted to the maximum LTV (loan to value) the
lender offers. The rent will also need to be sufficient to meet the lenders criteria for the higher amount of borrowing.
Please note: most lenders will not allow further advances until the property has been owned for at least 6 months.

Remortgages
Where additional borrowing requirements cannot be met by the existing lender by a further advance or perhaps if a
competing lender offers a better rate, it may be possible to remortgage. This means the mortgage will be moved from
the existing lender to a new lender. As this is a legal transaction, a new survey will be required and a solicitor will need
to complete the legal work. The costs for the survey and legal work may make this option more expensive, however
some new lenders will offer to pay some or all of the costs to remortgage to them. Again, note most lenders will not
normally allow you to remortgage to them until you have owned the property for at least 6 months
Summary

We hope you have found this guide useful.

If you would like further information or would like a free review of your existing portfolio or help with planning your
property purchase financial strategy please contact us on:




01708 676133

info@connectmortgages.co.uk



More information, tools and mortgage rate comparisons can be seen on our website below:

                                 www.connectmortgages.co.uk

				
DOCUMENT INFO
Categories:
Tags:
Stats:
views:4
posted:5/20/2012
language:
pages:9