In principle, the ending of the Stamp Duty holiday marked a return to business as usual for the property market. In practice, the property market still has to face the long-term impact of both COVID19 and Brexit. It may also have to absorb politically-driven changes. With that in mind, here are some points that property investors should consider.
Should you become a limited company?
If you’re still holding property in your own name, you may want to give serious consideration to transferring it to a limited company. This can give you a lot more flexibility in how you manage the income from your investments.
For example, you could pay yourself a salary or pay yourself dividends (or combine both). You could also bring other people on board as shareholders. This could simply be a way to share the profits of your company with your loved ones. Alternatively, it could be a route to financing and/or a path towards exiting your investment if you ever decide you want to move on.
How active is the market likely to be?
With so much activity over the last year, it’s reasonable to consider how active the market is likely to be going forward. In simple terms, the slower the market is likely to be, the longer it is likely to take for investors to be able to buy or sell property. This means that investors will particularly benefit from thinking ahead and giving themselves plenty of time to act.
Where are people likely to want to live?
This question could possibly be rephrased as “what is the future of remote work (and study)? If there is a long-term shift to remote/hybrid working models (and study models), it could lead to a reduction in demand for property in cities, suburbs and traditional commuter towns. On the other hand, it might not.
People may choose to stay in cities and their surrounding areas even if they have the option to move elsewhere. If they are established in these areas, they may prefer to stick with what they know. This will probably be a particular consideration for parents with school-age children. Similarly, people may choose to move into these areas because they like the lifestyle and/or the community.
It is, however, probably fair to say that remote/hybrid working models (and study models), could make people weigh up their options more thoroughly and carefully. For example, a city dweller might not be tempted out into the countryside but they may be tempted into the suburbs or an established commuter town.
Likewise, students may continue to attend real-world universities despite the price if they perceive that this option delivers the best, overall value. Real-world universities may, however, come under stiff competition from remote learning (e.g. the Open University) and apprenticeships. Investors in this market should, therefore, be particularly vigilant.
What is the future of short-term lets?
The short-term lettings sector may have become one of the most controversial business sectors in the UK. This means that investors active in (or even just considering) this sector must be prepared for the possibility of increased regulation and/or taxation.
Essentially, lawmakers, both national and local, will need to find a way to balance tourism with providing homes for residents. They may therefore increase their efforts to regulate new entrants to this area. They may also step up enforcement measures for existing regulations.
If investors are already operating and are staying within the law, local authorities may not be able to force them to give up properties. They may, however, look for ways to apply financial pressure to encourage investors to move on if they considered that they were using up too much of the local property stock. Investors might therefore want to proceed with caution, if at all.
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Babies are a lot of work. That’s a large part of the reason why parental leave is so valuable. It allows parents to concentrate on parenting. At the same time, life does go on and new parents do need to keep on top of it. With that in mind, here is a quick guide to (re)mortgaging and parental leave.
Lenders are concerned about affordability
The first point to tackle is the elephant in the room. Lenders are required to examine a borrower’s ability to repay a mortgage. Parental leave and the expenses of having a baby can both significantly impact a borrower’s ability to pay. They can therefore make it harder to get a mortgage.
There is, however, a clear difference between “harder” and impossible. In general, the key to success is to understand the obstacles you are likely to face. Then you can work to overcome them. In general, and as is often the case, the better your advance planning, the easier the change is likely to be.
Planning ahead impresses lenders
When lenders assess your ability to pay, headline figures are only part of the story. They also look at your ability to manage your finances. In the context of mortgage applications, this means a lot more than “just” paying your bills in full and on time. That said, this is an excellent place to start. It also means showing that you’ve thought about what the future might bring.
For example, if you’ve been planning on starting a family, have you been saving hard to build up a significant “cash cushion”? Once your parental leave is over, do you have a plan in place for childcare? If so, how are you going to finance it? Be very careful about relying on family help. Your family may be willing but they are not guaranteed to be able, especially when it comes to grandparents.
Have you been able to build up an income stream outside of employment? If so, can you feasibly continue with it while also caring for a baby? How much income can you realistically generate from it? Do you have any other assets you can monetize, even temporarily, like a spare room?
Don’t blow your deposit on the baby
There are certainly some items you’ll need for your baby, especially if you’re a first-time parent. Keep in mind, however, that new parents are prime targets for advertisers. Ignore paid-for promotions. Go onto real parenting groups and find out from other parents what you actually need and what you don’t. Also, try to buy pre-loved as much as possible.
Consider your timing
This may not be an option for everyone on parental leave. It is, however, at least worth considering if you can. The last trimester of pregnancy and the first three months of a newborn are both joyous and exhausting. If you can’t sort out your mortgage before that time, then it might be easiest to wait until later.
Usually, by the time babies are about three months old, they are starting to develop a more predictable rhythm. They also tend to sleep for longer at a time, particularly at night. Both of these changes can make it a lot easier for parents to organize non-baby-related aspects of their lives. It will also give a potential lender a better idea of how you’re managing your finances now that you’re parents (again).
Use a mortgage broker
Even if you tick every box as an ideal mortgage candidate, it can still be worth using a mortgage broker. Firstly, it can save you time. For new parents, there’s probably nothing more precious. Secondly, mortgage brokers really can suggest deals you might never have found yourself. For new parents, this can be literally invaluable.
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You may need a mortgage for decades but you don’t necessarily have to stay on the same mortgage for all that time. In fact, you should make periodic checks to determine whether or not you’re still on the best deal. If you’re not, you should move as quickly as possible. Here is a brief guide to help.
This is probably the single most important tip of all. When you sign up for a mortgage you will be told when your initial deal ends. That basically gives you a deadline to work towards. Be sure to allow yourself ample time to do thorough research before your current deal ends. Remember to allow extra time for holiday periods such as Christmas.
Keep your credit rating in good order
There are all kinds of reasons why this is important. Maximising your options for remortgaging is just one of them. At a minimum, try to avoid putting yourself in a situation where you’re going to have to repair damage to your credit rating. Where possible, take proactive steps to boost it. For example, make sure that you’re on the electoral register at your current address.
Check your credit record for errors before you start applying for new mortgages. Do this well in advance so you have plenty of time to get mistakes corrected. Remember, a lot of businesses (and organisations) are probably going to be working through the backlog of COVID19 for quite some time to come.
If you know your credit rating has taken a hit, possibly due to COVID19, then commit to seeing a mortgage broker. They may be able to find you a deal you wouldn’t have been able to access yourself. In any case, you have nothing to lose by trying – and potentially a lot to gain.
Aim to minimise your LTV ratio
The LTV ratio (or loan-to-vehicle ratio) describes the value of your loan as compared to the value of your home. This is where remortgages can have a massive advantage over regular mortgages. If you’ve been in your current home for a while, you’ll have paid off some of your mortgage. There’s also a decent chance that your home will have increased in value.
This means that even if you haven’t been able to make savings over the last year or so, you could still be an attractive prospect to a lender. If you have been able to make savings, you might want to consider putting them towards reducing your mortgage.
You would have to move carefully here. If you leave yourself short of savings, you could end up having to take out consumer credit. This could leave you worse off than if you’d just paid extra on your mortgage. On the other hand, if you can reduce your mortgage principal and maintain a decent “cash cushion” you could save yourself a lot of money.
Speak to your current lender
Never just assume that your current lender will offer you the best deal on your remortgage. At the same time, never just rule them out either. Find out what they can offer you so that you can compare it with your other options.
Check-in with a mortgage broker
It is literally a mortgage broker’s job to know the mortgage market inside out. Even if you’re a highly desirable customer, using a mortgage broker can save you a lot of time. If you know that you have hurdles to overcome, then a mortgage broker can help move them out of your way.
In particular, if you’ve seen your credit rating and/or finances damaged by COVID19 definitely speak to a mortgage broker about your options. They may still be able to find you a much better deal than your lender’s Standard Variable Rate.
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It’s lovely if you can pay off your mortgage before you retire. In reality, however, that isn’t always feasible. This means that it can be useful to look at your options for dealing with a mortgage while in retirement.
If you want to move to a smaller property anyway, then astute downsizing can go a long way towards dealing with an outstanding mortgage. The key word in that sentence, however, is “astute”.
To make downsizing work financially, you need to find a suitable property at a suitable price. This price needs to be low enough to make it worth your while to pay all the expenses associated with moving. Ideally, the property should also have low running costs. If not, then it should have the potential to be upgraded and this should be reflected in the price.
If all these conditions are met, then downsizing can be a way to release equity from your current home while still allowing you the benefits of home ownership. Even if it doesn’t pay off the mortgage completely, it should lower your repayments and hence make them easier to manage.
Selling up and renting
This is essentially a variation of downsizing. You swap mortgage repayments for more affordable rent payments. You also release the equity in your old home to use as you wish. Although you might feel hesitant about returning to renting it does have its advantages.
In particular, disposing of your property can make a significant difference to a future Inheritance Tax bill. If you choose to make gifts out of the equity now and live for a further 7 years, those gifts are excluded from IHT calculations. Even if you die within 7 years, the gifts may still be eligible for taper relief.
Equity release plans come in two main forms. With a lifetime mortgage, you borrow against the value of your home. The interest can be waived until you die, at which point it is paid out of your estate. Alternatively, you may be able to make repayments during your lifetime.
With a home reversion plan, you essentially sell a stake in your home. When you move on, the proceeds from the sale of your home are split between you and the lender in an agreed percentage.
Although the basics of both products are simple, using either form of equity release can have major financial implications. For example, the cash you receive by releasing your equity can affect your entitlement to means-tested benefits. It’s therefore essential to get professional advice before making any decisions.
Retirement mortgages are essentially variations of regular interest-only mortgages. The key variations are that there is no set term and that there is no need to have a plan to repay the capital. Instead, you make interest payments each month for as long as you remain in the property and then when you move on, the property is sold to pay off the capital.
It is, however, important to note that, as with regular mortgages, your home may be at risk if you do not keep up repayments. You can, however, exit the mortgage by selling the property. If you do, you could potentially benefit from capital appreciation although this is not guaranteed.
Monetising your property
If you don’t want to give up your property, you might want to consider turning it into a source of income. Possibly the most obvious way to do this would be to take advantage of the government’s “rent-a-room” scheme. Depending on where you live and the type of property you own, there may be others.
The disadvantage of this approach is that it could put you to some inconvenience you’d rather avoid. For example, you might not particularly want to have lodgers in your home. You may, however, decide that overall the pain is worth the gain.
For equity release products we act as introducers only
Life may not be easy for first-time buyers. You do, however, potentially benefit from several government schemes. That said, it’s vital to understand what these mean in practice. They have potential drawbacks as well as advantages. With that in mind, here is a quick rundown of the main options.
The Lifetime ISA
The Lifetime ISA is essentially a government-boosted savings scheme. You can save up to £4K each (tax) year and get a 25% bonus added. In other words, you can get up to an extra £1K per year.
Lifetime ISAs can only be used either for the purchase of a first home or to finance retirement. If you withdraw funds for any other reason, there is a 25% penalty applied to the whole sum. This means that you are effectively charged to withdraw the money you put in.
For example, you pay in £4K and get the £1K bonus. You then need to withdraw your money. The 25% penalty is £1250 so you lose £250 of your own money. This may be amended in future. For the time being, however, it is a consideration you should keep in mind.
The Mortgage-Guarantee scheme
This is often known as the 95%-Mortgage scheme and is essentially a reboot of the old Help-to-Buy scheme. It works along the same lines. If buyers can put down a 5% discount, the government will guarantee up to 15% of the remaining mortgage. This means that the effective loan-to-vehicle rate is 80% rather than 95%.
Keep in mind, however, that this guarantee is for the lenders rather than the borrowers. In other words, if you default, they will be protected to the extent of the guarantee. You will still have to deal with the standard consequences of default.
The Help-to-Buy Equity-Loan scheme V2
This is essentially the same as the original Help-to-Buy Equity Loan scheme. The two main differences are that it is only open to first-time buyers and that it has regional price caps. In short, if you can put together a 5% deposit, you can borrow up to 20% of the purchase price of your home from the government. You need to get a standard mortgage for the reminder.
There are, however, three key points to remember. Firstly, the Help-to-Buy Equity-Loan scheme V2 is only available on new-builds. Secondly, the government will own an equivalent stake in your home. This means that any increase in your home’s value will result in you paying more to buy out the government’s stake in it.
Thirdly, if you can’t repay the loan within 5 years, you will have to pay interest on it. Currently, any repayment has to be at least 10% of the home’s market value at that point. If you can’t afford that, then you will have to keep paying interest on the full amount until you can (or you sell).
The First-Homes scheme
The First-Homes scheme currently only applies in England. It offers first-time buyers a discount of 30%-50% on new-build properties. The standard discount is 30% but local authorities have the option to increase this to a maximum of 50% as long as they can justify the decision. The discount must be passed on to any future buyers.
There is a price cap of £250K outside London and £420K inside London. There is also an earnings cap on candidates of £80KPA outside London and £90KPA inside London. Local authorities have the option to prioritize certain groups of first-time buyers for the first three months of property marketing. After this, they must allow any qualifying application.
The main potential disadvantage of the First-Homes scheme is that it may be very hard for regular first-time buyers to qualify for it. For example, local authorities may use it to encourage key workers to stay in higher-cost areas.
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You can get online mortgage calculators to help you figure out the likely cost of your mortgage. It is, however, useful to understand the factors you need to consider. Here is a quick guide to help.
Calculating the total cost of a mortgage
It’s vital to remember that you can only compare mortgages fairly if you look at their total cost rather than just the headline interest rate. Sometimes this will involve making estimates but you should be at least fairly confident that your estimates are accurate. If you’re not sure how your finances are going to look over the next few years, maybe a mortgage is not for you right now.
The main factors influencing the cost of a mortgage are:
- The interest rate
- The term and amortization period
- The initial set-up fees
It’s also advisable to know the early repayment penalties.
The interest rate
Interest rates can be variable or fixed. Variable rates track the base rate set by the Bank of England. In principle, this means that they have infinite scope to go up but can only go down as far as zero (unless the BoE did introduce negative interest rates). In practice, mortgage lenders may choose to set a minimum rate that would apply regardless of how low the BoE set the base rate.
Fixed rates give you security but they do not necessarily work out more affordable than variable-rate deals. For example, they may have added fees that increase the price, especially if you add them to the loan. You will then have to pay interest on the fees too.
It’s also worth pointing out that fixed-rate mortgages are fixed in both directions. In other words, if interest rates go down, you still pay the same fixed rate. This may not be much of an issue at the moment. It is, however, worth noting in case the situation changes in future.
The term and amortization period
A mortgage term is essentially the length of any initial deal e.g. a five-year fix. The amortization period is the length of time it will take you to pay off the mortgage. Both will play a role in the cost of a mortgage.
The term of your mortgage determines when you need to choose between remortgaging or going on your lender’s standard variable rate (SVR). The length of your mortgage amortization period influences how much interest you will pay overall. In short, if everything else is equal then a mortgage with a shorter amortization period will be more economical than a mortgage with a longer amortization period.
The initial set-up fees
The initial set-up fees can be divided into fees you pay regardless of lender (e.g. valuation) and fees which depend on the lender. It’s useful to know both so you can judge the cost of remortgaging. You also need to know if you can pay these fees upfront or if you’ll need to add them to your loan. If the latter, you’ll need to factor in the cost of the interest payments.
The early repayment penalties
You may not plan to pay off your mortgage early but life doesn’t always go to plan. If that sounds depressing, remember luck can be both good and bad. Luck is, however, a part of life, or, more formally, your circumstances can change. If they do, you may need to exit your mortgage before the term ends so it’s advisable to know how much this will cost.
These are the main financial points you should note. There may, however, be other factors you want to consider. For example, you might want to look for a mortgage that comes with a key benefit, like some level of flexibility with payments. It’s absolutely fine to take this into consideration. Just be sure that, overall, you’re getting the best possible deal for your cash.