fbpx

Tag: buy to let

The basics of buy-to-let finance

The basics of buy-to-let finance

The arrival of the 2020 financial year will spell the end of what remains of mortgage interest tax relief.  Although this won’t be exactly news to buy-to-let landlords, it has been in the process of disappearing since April 2017, it may be a useful prompt to buy-to-let landlords to review their finances and make sure they have the right financial products for their situation.

Mortgages

Traditionally, repayment mortgages have been the more expensive option for landlords, but hey offered the benefit of allowing a landlord to build up real equity in their portfolio and, ultimately, to end up owning the property in its entirety.  Interest-only mortgages, by contrast, were more affordable and allowed landlords to maximize yield, thus increasing their income for the duration of the mortgage.  The abolition of tax relief on mortgage interest may, however, have changed this subtly.  The reason for this is that as a repayment mortgage progresses, the borrower pays less and less in interest and more and more of their repayments go towards the capital.  With an interest-only mortgage, however, the capital is never repaid (or at least not until the end of the mortgage), which means that the borrower continues to pay interest at the same rate throughout the course of the mortgage.  In the old days, this was largely irrelevant, as mortgage interest could be set against tax, but now that the old system of tax relief has now been replaced by a system of flat-rate tax credit, landlords could find that the difference is meaningful even without the benefit of building up equity.  As always, people need to do their own sums, but it is definitely worth checking.

Insurance for your property

In addition to taking out standard insurance on the fabric of the building, landlords may want to consider whether or not they want to cover the contents.  Even if the property is let unfurnished, it will presumably have at least a kitchen and a bathroom and these can be expensive to replace if your tenants leave them damaged.  They can also cause expensive damage to your tenants’ property if they malfunction, for example, if a washing machine springs a leak, so you might also want to consider protecting yourself against that.  Finally, although this is not, technically, protecting your property, you might want to take out insurance against loss of income from it, be it through non-payment or through voids.

Insurance for yourself

Harsh as this may sound, protecting your property starts with good tenant selection.  There is simply no two ways about this.  There is, however, a potential complication in that landlords need to select tenants in a way which complies with the law, in particular the Equality Act 2010.  This may seem self-evident, but it can be surprisingly easy to act in a way which may be considered discriminatory, or at least perceived as discriminatory by a potential tenant, especially if a landlord is nervous about falling foul of the “Right-to-Rent” rules.  Lettings agents may be useful here, but if landlords choose not to use them (or even if they do), it may be advisable to take out some form of legal expense insurance for landlords.  This may also be useful if landlords have to deal with problem tenants.  Last, but by no means least, landlords may wish to think about insuring their own health, especially if they are active in the management of their portfolio (as opposed to leaving it to lettings agents).

A final point

If you are using a financial product for a buy-to-let property, then you must take out products which are intended for that market, not products for the residential market.

 

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. 

 The FCA does not regulate letting agents and we act as introducers for them.

 

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.

A beginner’s guide to property investment

A beginner’s guide to property investment

If you’ve been paying attention to the financial news, you’ll probably have noticed that there have been numerous articles highlighting the increasing challenges faced by property investors in general and buy-to-let property investors in particular.  The fact still remains, however, that the UK has a high demand for property and especially for high-quality rental property.  This means that there are still very respectable profits available to astute property investors who operate in the right way.  If that sounds like something which would interest you, then here is a beginner’s guide to property investment.

It’s not just an old joke, location really does matter

If you’re planning on managing a property yourself, then you’re probably going to want to look for properties which are within practical travelling distance of where you live.  These days, however, property investors, especially beginners, might want to give serious consideration to using a lettings agent to ensure that every aspect of their buy-to-let business is managed in total compliance with the law.  This does add to costs, but it also means that investors can look at a far greater range of locations since they will not need to travel to them personally (or at least not often).

Teamwork makes the dream work

For “hands-on” investors, having an address book full of useful contacts (such as reliable and proficient tradespeople) can make life go so much more smoothly.  For “hands-off” investors, a good lettings agent can be more than worth their fee.  In either case, having an accountant on board is not just a convenience from the point of view of managing your tax returns with minimal hassle, but an investment from the point of view of minimizing the amount of tax you have to pay.  You may also want to have a lawyer on your side, particularly if you are a “hands-on” investor.  As previously mentioned, the UK buy-to-let market is becoming increasingly regulated and penalties for non-compliance, even inadvertent non-compliance, can be very severe.  You might also want to consider becoming a member of relevant associations and other networks as a handy way of keeping on top of developments in the property market and of benefitting from other people’s experience.

Make sure your portfolio is built on solid foundations

A rising tide floats all boats and a rising property market effectively gives property investors some leeway to make mistakes and escape unscathed (or with very little damage done to them).  When the property market is stagnant or falling, property investors need to tread more warily.  This has always been the case but recent developments have made it even more important that investors get their sums absolutely correct right from the off.  In this context, there are two changes which are of particular note.  The first is that Mortgage Tax Relief is in the process of being abolished, which could have significant implications for investors on higher incomes.  One way to deal with this is to hold property within a limited company, however, this carries a number of implications which need to be clearly understood before a property investor can make an informed decision as to whether or not this is the right approach for them.  It’s also worth noting that if you are a new property investor and choose to go down this road, you almost certainly want to buy your property through the company right from the start to avoid the costs of transferring it into the company further down the line.  Secondly, the government has now finally banned landlords charging additional fees to tenants, which means that it is now utterly vital that property investors have a clear view of all the expenses they can reasonably be expected to incur (and ideally a margin of safety) so that these can be incorporated into the rent tenants pay.

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.

The FCA does not regulate tax planning and we act as an introducer for it.

 

Talk With Us On Facebook