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The key points of buy-to-let finance

The key points of buy-to-let finance

Even though the government seems to have been subjecting buy-to-let property investors to a non-stop barrage of financial attacks, the fact still remains that the laws of supply and demand still favour property investors.  At this point in time, however, it is no longer possible for investors simply to blunder into property blind and wait for a rising tide to do its work.  Now property investors really have to be careful to buy the right properties, in the right locations at the right prices and to be completely sure that their numbers add up.  With this in mind, here is a quick guide to the key points of buy-to-let finance.

Mortgage Tax Relief is coming to an end

This fiscal year is the last year in which Mortgage Tax Relief will exist at all and only in a very reduced form.  The announcement that Mortgage Tax Relief was to be abolished was widely reported in the financial press, as was the fact that the change meant that some landlords might be better off switching to a limited company structure.  This is a complex topic and might be worth discussing with a financial professional.  The more simple point to remember is that you will need to factor this change into your financial calculations, especially since you are no longer permitted to charge “add-on” fees to your tenants.

A ban on “add-on” fees

Picking up on the previous point, as of June this year it will cease to be permitted to charge tenants any extra fees over and above their rent.  This is entirely separate to the ban on letting agents charging fees to tenants.  In principle, this should not actually make any difference to a landlord’s finances because it will simply mean that instead of fees being charged at the time the service is rendered (or shortly thereafter), they will be factored into the level of rent charged, however this does put the onus on the landlord to have a totally clear view of everything which they will need to charge to the tenant rather than only thinking about it when the job needs to be done and billed.

The removal of the “wear-and-tear” allowance

This is another change which really is probably more about administration than finance, the old 10% “wear-and-tear” allowance is no more and now landlords have to itemise each deductible item.  In short, if you have never been in the habit of holding onto receipts for maintenance and upgrades to property, then you need to start developing it.

Stamp duty tips against investors and towards first-time buyers

The 3% surcharge on second or subsequent properties, has been a fact of life for some time now, however, the decision to relieve first-time buyers of the need to pay stamp duty is rather more recent.  In principle, improving affordability for first-time buyers as compared to other buyers (especially investors) could make it more difficult for investors to secure quality property, but, then again, the fact that buy-to-let landlords will simply pass on their expenses to their tenants may counterbalance this.

The issue of affordability

Anyone interested in starting a buy-to-let portfolio (or expanding an existing one), should be aware that mortgage lenders are now obligated to undertake affordability checks on “portfolio landlords” currently defined as a landlord with four or more distinct mortgaged Buy to Let UK rental properties (or seven or more for remortgage applications without capital raising).  This definition could, of course, be updated and/or the requirement for affordability checks extended to all landlords seeking mortgages.

Regulatory issues

As a final point, letting residential property is now a highly regulated activity and regulations can and do change so landlords must keep appraised of them otherwise they risk financial penalties, even if their only offence was an administrative error with no real-world impact.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages.

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Moving Down In The world

Moving Down In The world

Family homes are great for families, but once children fly the nest, they can suddenly become a whole lot bigger than one or two people need, or want, on their own, and for all the happy memories they have helped to create, it’s often the right decision for people to move onwards and downwards, into a cosier home, which requires less cleaning and maintenance.  Downsizing can seem like an intimidating task, especially if it’s been a while since you last moved, but there are many advantages to it, such as releasing equity in your current home, allowing you to move somewhere better suited to the final stages of the ageing process and, last but by no means least, allowing you to clear out your physical possessions at your own pace.  If you’re one of the many people who are thinking about downsizing, here are some tips to get you started.

Persuade children/grandchildren/other people to clear out any remaining belongings

If you’ve been living in the same house for an extended period, while the young adults (or other people in your life) have been moving around, then your home may have become an unofficial storage unit.  Start your downsizing journey by speaking tactfully to the relevant people and, where possible, encourage them to move their stuff from your home.  If they’re really not in a position to take back their belongings and you still want to help them, then you may want to add helping them with a storage solution to your list of downsizing tasks.

Downsize your possessions working from the every day to the sentimental

There are varying approaches to downsizing and you might want (or need) to try out a few before you find the one which works for you.  Two common approaches are to start by item and to start by area (or you could try starting with specific items in a specific area).  Whatever approach you choose, you may find it easiest to start with items which are purely functional before working your way towards items to which you have a sentimental attachment.  When you do come to sentimental items, remember that the extent to which you purge is entirely up to you, so if you have a genuine emotional attachment to something, then it’s perfectly reasonable to keep it, however, you might also want to consider the option of taking a picture of it and moving it on to a new home to make someone else happy.

Photograph your home (and garden) in “sale-worthy” condition

Whatever your future plans, it makes sense to achieve as a high a price as possible on your current property, even if you don’t need it now, it may be helpful for later in retirement or you could give it to someone else (or your favourite charity).  A standard part of the sales process is to put your existing home into the best, possible condition, such as by undertaking any outstanding maintenance tasks (indoor and outdoors), refreshing the decoration and decluttering.  This could be a great opportunity for you to photograph your home looking its absolute best and you could even get your photos bound into a photobook as a lovely souvenir of your family home.  The photos you take are likely to be very different from sales photos, which are created to show off the house in a way which allows a potential buyer to visualise themselves living in it.  These photos are a hugely important part of the sales process and if you choose to sell your home yourself, you may wish to organise a professional photographer to take them for you.  That said, you may find that opting for a traditional estate agent offers a higher level of convenience and can be more economical than you might expect.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

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Maximising your chances of being approved for a mortgage

Maximising your chances of being approved for a mortgage

If you are buying your first home or moving to a bigger one, then there’s a very good chance that you’re going to need a mortgage to help you to do so.  The bad news is that being approved for a mortgage is very far from a formality.  The good news is that it is possible, as evidenced by the many people who successfully do so each year.  With that in mind, here are some tips on maximising your chances of mortgage approval.

Build a deposit

There are two good reasons why mortgage lenders prefer borrowers with larger deposits.  The first reason is the straightforward fact that larger deposit lowers the lender’s exposure to fluctuations in the property market.  In principle, the borrower is responsible for the mortgage, but, in practice, if the worst comes to the worst and the borrower goes bankrupt, it will be the lender who is left on the hook.  The second reason is that the ability to raise a large deposit shows that the borrower can save (or has access to financial support from other sources).

Make sure your credit record looks as good as it possibly can

In addition to checking for any clear errors (and getting them corrected), see if you can go a step further (or several steps further) and actively improve it.  Sometimes even simple changes can make a difference (possibly only a small difference, but every improvement is a gain).  For example, if you’re not on the electoral roll, then get your name added (and if you are on, make sure you’re listed at the address you’ll be giving to your mortgage lender) and if possible, add a landline phone number.  On a larger scale (and with potentially more impact), make the time to pay off any small-scale debts you are carrying, such as credit cards you hardly use, and then actually close them (rather than leaving them in limbo).  In fact, if you still have any credit cards with zero balances, then ask yourself if you really have a compelling reason for keeping them open and if the honest answer is “no” then close them.  If you need any more encouragement to take this step, then remember that every financial product you own is a potential point of compromise and so minimising the number of companies which have access to your financial details should also reduce the likelihood of you becoming a victim of fraud and/or identity theft.

NB: remember that the UK has three main credit-reporting services Experian, Equifax and CallCredit and you will need to check your record with each of them to get a full picture of how your financial history will look to a lender.

Keep your finances on a steady track

Remember that your credit record is only the first check a lender will make.  If you pass this hurdle, they will want to take a more detailed look at your spending by means of your bank statements.  With this in mind, you want your statements to give the impression of a person who lives their life in a way which is unlikely to give a potential lender a moment’s cause for concern.  So, for example, unless you are really desperate to leave a job you hate, wait until your mortgage is 100% secured before doing so and if your plan is to start your own business, then hold off making any purchases which make this obvious to the lender.  In other words, while you have to answer any questions truthfully, you only have to answer what they actually ask.  Always remember, however, that the onus will be on you to keep up with your mortgage payments and that the consequence for not doing so can be losing your home, so resist any temptation to over-stretch yourself from the start.

Your property may be repossessed if you do not keep up repayments on your mortgage.

On clicking the above link, you will leave the regulated site of Coombes & Wright Mortgage Solutions Limited. Neither Coombes & Wright Mortgage Solutions Limited, nor Sesame Ltd, is responsible for the accuracy of the information contained within the linked site.

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Making the most of fixed-rate mortgages

Making the most of fixed-rate mortgages

Interest rates in the UK are still extremely low, although it may not seem that way to borrowers.  That means, mathematically, there is a whole lot more scope for them to move upwards than for them to move downwards.  With that in mind, borrowers might want to spend some time considering whether a fixed-rate mortgage would be the right choice for them.  Here are some points to consider.

Can I actually manage a mortgage at all?

If you are renting, then do your best to suck all the emotion out of the decision as to whether or not you want to “get on the property ladder” in the near future.  This can be very difficult, so you might want to enlist the help of a knowledgeable friend or financial professional).  If you are currently a homeowner and you have concerns about your ability to service your mortgage, then again, think long and hard about whether or not fixing your interest rate would really be the best approach or whether it might be best to sell now on your own terms and look for somewhere to rent.  This is probably an even harder decision than deciding whether or not to buy your first home, especially if there are children involved, but accepting reality now could end up being less painful than winding up in a foreclosure situation.

Does remortgaging make financial sense?

If you already have a mortgage then there’s nothing to stop you asking your existing lender if they’ll offer you a fixed-rate deal, but if they won’t, or you’d like to move elsewhere for a better offer, then you’ll essentially have to go through the whole mortgage-approval process all over again, with all the cost and hassle that entails.  Is the gain worth the pain?

Would an offset mortgage be a better option?

With an offset mortgage, you keep your cash savings with your mortgage lender, which sets them against your mortgage balance when calculating how much interest you are due to pay.  (Savers keep access to their savings and can use them as necessary or desired).  The basic idea is that it makes sense to forgo interest on your savings as it will be less than the interest you pay on your mortgage, which, in and of itself, is generally true (although it has to be acknowledged that there are different savings products with different rates so the sums can be a bit more complex than they might first appear).  In addition to the difference between the interest paid to savers and the interest paid by borrowers, there is also the fact that tax is charged on interest income.  Hence, if you are looking for ways to save money on your mortgage, then an offset mortgage could be an interesting option, particularly if you are a higher-rate taxpayer.

Would I benefit from the stability of a fixed-rate mortgage?

The real benefit of fixed-rate mortgages is stability, the security of knowing that your mortgage payments will be the same from one month to the next regardless of what happens with interest rates, however, this stability comes at a price as lenders which offer fixed rates will price them to reflect their perspective on what will happen in the future.  The longer the term of the fix, the harder it becomes to predict what will happen and hence the more a lender is likely to charge to protect themselves from the risk of making a loss on the mortgage.  In other words, fixed-rate mortgages may actually work out more expensive than variable-rate ones.  They also require you to have a plan of action for when the fixed-rate comes to an end, i.e. are you just going to accept a switch to a variable-rate mortgage or are you going to negotiate a new deal (or both)?

Your property may be repossessed if you do not keep up repayments on your mortgage.

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What you need to know about mortgages

What you need to know about mortgages

In the UK, mortgages used to come in two main types, interest-only and repayment.  Now, it is practically impossible to take out an interest-only mortgage on a residential property (although it is still entirely possible to take out an interest-only mortgage on an investment property), which does relieve residential buyers in the UK from one key decision, but does leave them with another, namely, which specific type of repayment mortgage is the right one for them.

Standard repayment mortgages versus offset mortgages

Offset mortgages have been available in the UK for several years now, but they are still very much the newcomers in the UK mortgage market and as such may benefit from a bit of explanation.  The idea behind offset mortgages is that borrowers keep their cash savings with their mortgage lender, which then calculates the interest payable on the net amount (i.e. the outstanding balance on the mortgage itself minus the positive savings balance).  Borrowers keep access to their savings and can use them any time they need to.  In principle, this approach should provide a net gain as savers typically receive less interest income than borrowers pay in interest expense.  Objectively speaking, however, in and of itself, the calculation may be less straightforward as different savings products pay different levels of interest income and different mortgage products charge different levels of interest (and the same mortgage product may charge different levels of interest to different borrowers).  Having said that, it’s important to remember that tax is charged on interest income and hence forgoing it in exchange for reduce interest expense may generate meaningful savings, particularly for higher-rate tax payers.

Variable-rate mortgages versus fixed-rate mortgages

In and of themselves, variable-rate mortgages and fixed-rate mortgages probably need no further explanation, as the old saying goes, the clue is in the name.  It can, however, be rather more complicated to decide which one is right for you.  In theory, it might seem like a good idea to go for a variable-rate mortgage while interest rates are heading downwards, but fix when they look likely to head upwards again.  That way, you benefit when interest rates go down, but limit your losses when they go up (again).  In practice, however, there is a very real problem with this theory, which is that lenders are only too well aware of the fact that fixed-term mortgages shift the risk of interest-rate changes from the borrower to the lender and hence generally charge a premium to protect themselves from this risk.  In addition to this, lenders will typically only grant fixed rates for a specific period of time, and the longer that period of time, the higher the “fixed-rate premium” will be as the lender is assuming a greater degree of risk.  Once this initial period is over, you will either have to renegotiate another fixed-rate deal or move to a variable rate.  In other words, fixed-rate mortgages can work out more expensive than their variable-rate counterparts, plus they can involve a bit more administration.

On the other hand, however, fixed-rate mortgages do give borrowers stability and the reassurance of knowing that their payments will be the same from one month to the next regardless of what happens with interest rates and for some people this stability may be worth the extra money.  In particular, fixed-rate mortgages may be of benefit when interest rates are showing some level of volatility, perhaps going up or down a little each month, rather than either remaining constant or trending clearly in one direction or another.  In this situation, knowing that you’re going to be making the exact same mortgage payment each month, at least for the length of the fixed-rate period, can make budgeting a whole lot easier.

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

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