20% rise in number of buy to let mortgages is evidence of further growth

Landlord Expert
By Landlord Expert November 19, 2012 07:49

Buy-to-let is back, as cheap mortgages and strong tenant demand encourage more people to invest in property again. The number of new buy-to-let mortgages rose 20 per cent in the first nine months of 2012, compared with the same period last year, as more people become amateur landlords. This is according to new figures from the Council of Mortgage Lenders

Given disappointing investment returns elsewhere, should you give buy-to-let a chance?

The buy-to-let market is very strong, says Stuart Law, chief executive of property adviser Assetz. “Thousands of new investors are registering with us every month. They are looking for a safe place to put their cash that will produce a healthy and reliable income, with the potential for long-term capital growth. We expect this to continue.”

The get-rich-quick attitude towards buy-to-let is thankfully over, says Dan McLeod, director of estate agent Atkinson McLeod.

“The casino approach, where people were simply betting on short-term capital appreciation, is a thing of the past.

“Landlords are increasingly taking a 10-year view and are focused on rental yield, as they should always have done.”

Three factors are currently boosting buy-to-let: property prices are low, mortgage rates are cheap and demand is sky-high, as first-time buyers struggle to find a mortgage and are forced to rent instead.

“The meagre returns from leaving your money in a savings account is also driving more people back to bricks and mortar,” says McLeod.

Prime central London is booming, with rents rising 12 per cent in the last year, according to Lisa Hollands at estate agent EA Shaw.

“Demand from tenants is far outstripping supply, particularly for new-build, with new stock often let within hours of coming to the market,” she says.

Investors can also make money outside of the capital, says Steven Bond, managing director of residential lettings at Beresfords. He adds: “A refurbished studio apartment in Colchester bought for £64,995 can provide a gross yield of 7.4 per cent, far more than you would get from a savings account. Plus, you may also get capital appreciation over the longer term.”

However, don’t just rush into buy-to-let, take time to find the right property.

“You aren’t buying a property to live in yourself, so make sure your head rules your heart. Look for somewhere with good transport links, schools and shops, and low ongoing maintenance,” Bond says.

Investing in property is a long-term business decision, says John Heron, managing director at specialist buy-to-let lender Paragon Mortgages. “You must do your research thoroughly before buying. Check local demand, rent levels and how much your property is likely to yield.”

The yield is the annual rental income you earn as a percentage of the purchase price. So if you earn £5,000 a year from a property you bought for £100,000, the yield is 5 per cent.

The average landlord now earns a rental yield of 6.7 per cent a year, up from 6.2 per cent in June, according to the most recent figures from Paragon Mortgages. Plus, there is the prospect of capital growth on top, when the property market fully recovers.

Your lender will want to check that your chosen property will generate enough revenue to cover your mortgage and other costs, especially with a view to when interest rates start rising.

“Most lenders have much more stringent credit checks than before the financial crisis, which should lead to more responsible lending,” Heron says. You will need to put down a deposit of at least 20 per cent or 25 per cent to get a market-leading rate, adds Ashley Brown, director at mortgage broker Moneysprite.

“Make sure you have a little extra cash to cover legal costs, valuation charges, mortgage arrangement fees and stamp duty,” he says.

To give you a financial safety net, the rent you earn must be at least 25 per cent higher than your monthly mortgage repayments. “This is called rental cover, which protects you against interest rate hikes and void periods, when you aren’t earning any rental income because you can’t find a tenant,” he adds.

Interest rates on buy-to-let loans are slightly higher than standard mortgage rates, but arrangement fees tend to be notably more expensive, because this is a semi-commercial loan, Brown says.

“Virgin Money is offering a competitive two-year fixed rate buy-to-let mortgage at 3.49 per cent, available up to 60 per cent loan-to-value (LTV) with a £1,995 arrangement fee.”

You will pay more if you need to borrow a higher percentage of the property’s value.

“If you need an 80 per cent LTV mortgage, Yorkshire Bank is offering a two-year fixed rate at 5.29 per cent with a £999 arrangement fee,” says Brown.

Setting yourself up as an amateur landlord is a big responsibility, says Ashley Alexander, director at estate agent review website MeetMyAgent.co.uk.

“You may have to deal with troublesome tenants, void periods and problems such as a broken boiler, which always happens at the worst possible time. So make sure you go into it with your eyes open.”

You will have to declare your rental income on your self-assessment tax return, although you can also claim some expenses against tax, including repairs and maintenance, mortgage interest and letting agency charges.

Some private landlords hire an agency to manage their property. They typically have to pay them about 15 per cent of any rental income but at least this is tax deductible.

“If you decide to manage the property yourself, build a list of local tradesmen to call upon if anything goes wrong,” Alexander says.

Before new tenants move in, commission an independent inventory of everything in the flat, to avoid costly disputes later.

Take time to understand the rules surrounding houses in multiple occupation (HMOs). If you plan to let your property to three or more unrelated tenants, you may need to apply for an HMO licence.

Check your local council’s rules, as they can vary. Finally, work out whether you can get a better return elsewhere, with much less effort.

You may earn only 2.5 per cent from a savings account but at least you don’t have to worry about finding tenants, collecting rent or making emergency repairs.


Landlord Expert
By Landlord Expert November 19, 2012 07:49

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