Buy-to-let made simple

 

Even today, after much positive press on investment mortgages, the thought of applying for one and sitting with mounds of related red tape and legal-jargon paperwork still turns people off. It is time to do away with the common misconception that the process is expensive and lengthy.

 

The moment has come to lay the truth on the line – plainly and simply. With a conscious effort to avoid unnecessary long words and industry jargon, this article aims to explain the basics of buy-to-let mortgages and starts with the following ‘dummy’s’ guide.

 

First, successfully answer the following five questions:

 

1 Can I afford to do this? The first point of contact ought to be with a registered, specialist, buy-to-let financial advisor. The advisor will ideally indicate that a mortgage should cover the rental income by 130 per cent. Always make sure you have contingency funds and a professional planner.

 

2 Do I know my market? Ask whether the area has a demand for rented properties and which areas get the highest yields.

 

3 Who is my target market? Decide profile of the occupant you want living in your property and quality of the tenant.

 

4 Am I considering location? The area in which you buy will determine the quality of your tenant.

 

5 Am I thinking long-term? The property market is slow, so the benefits of investing will take time. Don’t expect to make a profit immediately.

 

Get a solicitor and mortgage in place, then set about finding a property based on the above criteria. Determine the potential rental income and, if this is adequate, put your offer in. At this point, the broker will take over communications and negotiations and announce the acceptance. Next you will get together with the broker to promptly complete application forms. The broker should do everything from here onwards.

 

To speed up the process, send back any information and/or documentation as soon as possible. Small delays on your part can cause a ripple effect which slows everything else down considerably.

 

After you have submitted your documentation, it’s time to wait. It will take approximately five to six weeks to hear the result. Then it’s time to make a profit on your investment.

 

Investing in a buy-to-let mortgage should be straightforward, easy and stress-free – if managed by an experienced advisor. The process is made even easier if you select an advisor who is also an established lettings agent, avoiding two start-up fees.

 

There are a number of issues that need to be considered in order to maximise your tax position, such as being able to offset your maintenance costs and letting agent fees, as well as any interest paid on a buy-to-let mortgage against your tariffs. If the agent is a knowledgeable financial advisor, this should be explained from the beginning.

 

Ask your advisor about capital gains tax and how to minimise overall fees through clever mitigation and intelligent finance control. Generally, the landlord pays levies on profit made from rental income over mortgage repayments, so, hypothetically, if rent is £1,300 and payments are £1,000, tax is charged on £300. Ask your mortgage broker for expert advice on overcoming heavy duties.

 

The buy-to-let investment scheme is designed to encourage the growth of the

private rental sector by persuading investors to take the opportunities given by the current low, highly competitive interest rates and the reasonable certainty of consistent capital growth. Investing in the scheme is a positive move as it is officially classed as an investment and taxed accordingly. Interestingly, buy-to-let mortgages are not regulated by the Financial Services Authority (FSA).

 

A buy-to-let lender will look at the rental yield to determine if it is a worthwhile investment, and some buy-to-let providers just ask that you have ‘some’ provable income.

 

Individuals are offered an opening in the market to invest their money in a property to let, which draws income to the landlord on a regular basis without being penalised with surcharges or paying commercial rates.

 

There are three main differences in buy-to-let mortgages and regular mortgages, namely rent potential, interest rate and size of deposit needed. The rent potential is calculated by the lender based on the rent the landlord will earn as well as annual income. In some cases, income is not considered at all and the decision is made purely on rental yield. Interest rates have a more severe consequence on investment mortgages that have slightly higher rates.

 

The large deposit option typically has a minimum requirement of 20 to 25 per cent of the property’s value. The majority of lenders tend to require an average of 15 per cent deposit, while a minority require only 13 per cent.

 

A key message here is that although this type of investment opportunity can be

slightly harder work than most investment options and offers no guarantee on future house prices, it is a good way to keep money safe for long periods of time. With the right research and careful homework, it could be highly lucrative.