Buy-to-let is a subject that has certainly been making headlines lately, and opinions are currently divided. Given the comments that have recently emerged from the Bank of England, who have voiced fears that the buy-to-let market could be doing more harm than good, we bring you a quick guide to buy-to-let mortgages, how they work and how to tell if they are right for you.
What is buy-to-let?
A buy-to-let mortgage is designed for landlords who purchase a property as an investment in order to rent it out. Because this type of mortgage has been specifically designed for those who are investing in property, different rules apply when it comes to securing one, and they are not suited for everyone.
The rules of a buy-to-let mortgage can vary much more between lenders compared to a standard mortgage. Some lenders will require a higher deposit, such as 25% or even 40%, whilst others may apply higher fees or additional rates.
How do buy-to-let mortgages work?
In principle, a buy-to-let mortgage functions in exactly the same way as a standard mortgage: a person borrows money from the bank to purchase a house and repays a certain amount every month, with interest. However, there are several key differences.
The future of buy-to-let
Buy-to-let mortgages have come under fire over the past few months, and as a result it appears that a number of changes are going to be introduced that may make the process a little trickier. Some have criticised investing landlords for purchasing houses and then renting them out, when these properties could be bought by first-time buyers or those who are looking to buy-to-live.
During the emergency Budget held on 8th July 2015, the Chancellor of the Exchequer George Osborne announced a new measure of restricting tax relief on buy-to-let mortgages. Under the current rules those who purchase a property and then let it out are able to offset their monthly payments against their working income. However, the rules will be changed to cut the amount of tax relief that landlords are able to claim. The new changes will be introduced in April 2017 and phased in over four years until the tax relief amount claimed is the same as income tax. This measure was introduced to create what the Chancellor called a “level playing field” between buy-to-let landlords and those looking to get on the property ladder.
That being said, buy-to-let mortgages can still be a fantastic investment for those who are looking towards the long term. Although the aim is certainly to get more people on the property ladder in a home of their own, there will always be a demand for rented properties, especially in cities for students and young professionals. The trick is to ensure that this is the right choice for you and your financial situation.
Is buy-to-let right for me?
Buy-to-let mortgages certainly aren’t for everyone, and are only suitable for those who are actively looking to invest in property and can afford to do so, as just like any other investment, property comes with its risks.
Taking out a buy-to-let mortgage certainly isn’t suitable for a first-time buyer, in fact you would probably struggle to get a buy-to-let mortgage if you don’t already own a home, either with an outstanding mortgage or outright. You have to be able to prove to the lender that you are able to afford the mortgage repayments, otherwise they won’t consider your application.
Your credit rating should be strong, you should be able to show that you can handle your finances and have a good income, at least £25,000 a year. If you are stretched too thin or have too many outgoing payments, such as credit cards or your existing mortgage, then you may not be able to prove you can afford the monthly repayments.
As with any long-term investment, whether you are purchasing a property to let out or to live in, it is essential that you take the time to evaluate your individual circumstances to decide whether it is right for you. Do as much research as possible, and seek help from a trusted mortgage adviser in your local area, as they will be able to analyse your finances to see if you are in a position to make an investment. The key is not to rush into any big decisions; this is a pretty big life-altering choice so take the time to ensure it is right for you.
New research conducted by estate agent Tepilo, founded by TV property expert Sarah Beeny, has painted a picture of what they believe to be the “average British home buyer”. According to the results, the average person looking to purchase a home in the UK this year will have a budget of £205,221 and will have owned two properties in their lives so far. Their property of choice? A three-bedroom, semi-detached property situated in the quieter suburbs and shared with their spouse or partner.
But will their home purchase in 2015 be the property of their dreams? The research by Tepilo, which surveyed 2,000 adults who are currently in the process of, or have bought, a property in the last 12 months, also discovered that 44 is the typical age that most people believe they will purchase a home that is perfect enough to spend the rest of their lives in. However, not everyone has bought into the idea of finding their ‘Forever Home’, as the survey showed that 20% of people don’t believe that such a home exists in today’s property market. Older prospective buyers were also found to be less optimistic regarding their ‘Forever Home’, with 33% believing it didn’t exist.
Location, location, location
The location of a home was discovered to be one of the biggest deciding factors when it came to completing a purchase, with proximity to supermarkets and shops, good transport links and low crime rates found to be the three most important factors. 56% of people wanted an easy commute from their home and 44% valued their proximity to shops.
The Tepilo survey also uncovered what people look for in the home itself, second to features such as number of bedrooms and whether the property is terraced, semi or detached. It appears that the size of the garden is something that nearly half (41%) of buyers take into account. The overall layout of the home was also important, with 34% considering it and 19% specifically looked for a property with a downstairs toilet.
Owner of Tepilo, Sarah Beeny, commented on the results of the survey: “We’re a nation that’s obsessed with property ownership, so it’s interesting to see how buyers are behaving and to discover the differences across the UK and amongst different age groups. It’s also interesting to see that Brits’ love of investing in property is still going strong, a trend I expect will continue as people increasingly look for alternatives to traditional pensions.”
This isn’t the first time location has proven to be a key factor. In August, MyLocalMortgage.co.uk conducted a survey that asked; ‘When buying a property, which factor would influence your decision the most, secondary to price?’ Almost a quarter (24%) of respondents said that proximity to work was their biggest concern, with being close to friends and family coming in second with 19.8%, and proximity to a town or city being the third major choice with 18.1%.
How to buy your ‘Forever Home’
Whether you’re 24 or 44, it’s never too early or late to start looking for your ‘Forever Home’ or the home you’d want to settle down in. The key is not to jump at the first property you discover that is in your budget. If you’re looking to purchase your dream home from the outset, it’s important to put a great deal of thought into exactly what you want.
What are your preferences? Do you want a large garden? A downstairs bathroom, or a dining room? More important than knowing what you want is also knowing what you are willing to compromise on, and what you absolutely cannot live without.
The final factor to consider is price; how much are you willing to part with to secure your dream home, and how much will your finances allow? Working with a mortgage adviser who is local to the area you wish to move to can be incredibly beneficial. They can provide you with expert advice on both the surroundings and your finances, helping you get one step closer to your Forever Home.
More often than not, the headlines surrounding the property market are rather negative, but the latest statistics actually presented us with some good news for a change. Figures released late last week showed that the number of house repossessions in the UK dropped to a new historic low for the second quarter in the year.
According to the Council of Mortgage Lenders, the period of April to June 2015 saw 2,500 homes repossessed in the UK, compared to 3,000 repossessions in the first quarter of the year. The drop looks even more impressive in comparison to the same quarter last year, which saw 5,400 homes repossessed by lenders.
Director General of the Council of Mortgage Lenders, Paul Smee, said that the figures were fantastic news: “Across all measures, mortgage arrears and repossessions are continuing to improve. We continue to see some amplification of the downward trend in repossessions, which may bring into question our repossessions forecast for 2015 as a whole.
“This trend is very welcome. Low interest rates are acting as a significant support for homeowners in general, and are likely to be helping to stave off low level arrears for stretched households in particular.”
Why have the numbers dropped?
News that the number of houses being repossessed has dropped for the second quarter running could be a sign of a slowly recovering economy, and a sign that recent legislative changes could be helping.
Under new government rules that came into effect on April 2014, hopeful homeowners will now have to answer a series of questions from their lender regarding their income and expenses. Along with presenting copies of your bank statements and any savings you have, applicants will be asked detailed questions regarding how much they spend each month, for example, on an average weekly food shop and whether there are any fixed outgoings such as gym memberships or mobile phone contracts.
Although this no doubt adds to the stress of buying a home, particularly with some reports stating interviews can last up to 3 hours, it helps lenders build a better picture about whether or not an applicant is a suitable candidate for a mortgage. Despite the extra pressure, the measures were implemented in an attempt to prevent future repossession, a protective method for both banks and borrowers.
While the measures detailed above may have played a part in ensuring that people are able to keep up on their mortgage payments, one of the biggest influencing factors was the news that the Bank of England would keep interest rates at a record-low 0.5%. This will no doubt be providing a huge amount of support for borrowers up and down the country who may otherwise have been struggling to keep up with their monthly payments. While this news is fantastic at the moment, it still means that there is the ever looming prospect that interest rates will suddenly spike, and mortgage payments along with it.
For anyone who has ever taken out a mortgage and purchased a house, the prospect of repossession is certainly a worry. And although there is no way to predict what will happen in the future, there are ways to think ahead and make sure that you have a plan in place should something bad happen.
This piece of advice applies to both before and after the mortgage application process. As it currently stands, lenders and advisers will want to see details of your finances dating back 6 months, along with savings, and lenders will also perform the standard credit check. If you are applying, get your finances in order by paying off any debts or credit cards and making sure your bank accounts are healthy. Another useful hint – it might be worth reining in your online betting activity too, as this is something that has hindered many applicants. That way you are in good financial condition when the bank comes to consider your application, and can prove that you are responsible.
Once you are in the house, making sure you have savings to fall back on is key. Unexpected circumstances can strike at any time, whether it’s a broken kitchen appliance or an expensive car repair, and you need to make sure that the mortgage and bills can be taken care of. Having a little nest egg tucked away in a savings account that you add to each month and can dip into whenever disaster strikes will take an extraordinary amount of pressure off your shoulders.
Use a mortgage adviser
When it comes to purchasing a house, many people think they can do it alone. Whilst this is true to an extent, having a mortgage adviser to turn to, who can handle all of the paperwork and money aspects for you, is incredibly beneficial. In the very beginning they will examine your finances and advise on the type of mortgage and amount that you could borrow, and will be able to provide advice based on your individual situation.
Speak to the experts
Should you ever find yourself in trouble with your mortgage, the important thing is not to hide from it. There are numerous services out there such as the Citizens Advice Bureau and the government-run Money Advice Service who can help you get back on your feet. And although it may seem like the last thing you want to do, speak to your lender as soon as you encounter difficulties paying your mortgage. The decreased number of repossessions could suggest that lenders may be willing to be more flexible and open to working alongside homeowners who may find themselves struggling.
The news of interest rates remaining low, coupled with repossessions in the UK dropping even further, are both welcome pieces of news; signs that the housing market may be regaining some stability. On the other hand, this means that the interest rates could rise sharply rather quickly. If and when that occurs, it is essential that both homeowners and house-hunting hopefuls are prepared to adapt to the changes.
Just two months after the Conservatives secured their first majority government in nearly 20 years, Chancellor of the Exchequer George Osborne took centre stage in the House of Commons to deliver an emergency Budget. Despite promises in their manifesto surrounding mortgages and the property market, there were very few announcements on these topics, with pension reforms and taxes taking more of the focus. Although this may be worrying to those hoping to kick-start the process of buying their own home, we explore the changes that were announced and how they will affect the property market and those looking to secure a mortgage.
Help to Buy scheme
During the run up to the General Election, the Conservatives were keen to reiterate their support for those looking to own their own home, and one of these measures was the continuation of the Help to Buy scheme, which came in two parts. The mortgage guarantee part, which allows lenders to buy a guarantee on a mortgage, will end at the end of 2015, however, the Help to Buy equity scheme, which helps those with smaller deposits, has been extended from 2016 to 2020.
In the March Budget, George Osborne announced a new addition to the scheme, a Help to Buy ISA which allows people to save up for their first home by boosting £12,000 of savings with a maximum bonus of £3,000 provided by the government. Although the Chancellor only briefly touched on these plans during the emergency Budget, a government document released after the speech detailed when the ISA would be rolled out. First-time buyers will be able to start saving using the Help to Buy ISA from the 1st December 2015 at participating building societies and banks, where they can deposit an initial £1,000 to start off their savings and then up to £200 per month thereafter.
Opinions on whether or not the Help to Buy ISA will actually help the housing market are widely divided, as while many believe it gives first-time buyers the push many of them need to get on the first rung of the property ladder, others believe it could distort the housing market by pushing up prices. Only time will tell whether this is true, but there is no doubt that it provides an added incentive and much needed boost to people’s savings.
Under the current rules, people who buy a home then let it out can currently offset their mortgage payments against their income, something which outright homeowners aren’t able to do. However, George Osborne yesterday spoke about creating a “level playing field” for both homeowners and investors by introducing a cut to the amount of tax relief that can be claimed. These changes will be introduced from April 2017 and then slowly phased in over four years, and will see the amount of tax relief that can be claimed set to the same level of income tax. Those who take out a mortgage and buy a house outright with the intention of letting it, may be put off by these plans as it means they will have to pay more for a house they don’t live in.
Some experts have expressed fears that the changes will affect tenants the most, as the prospect of decreased profits for landlords could cause a hike in rent prices. However, some are arguing that the announcement will work in the favour of first-time buyers. At the moment, those looking to get on the property ladder find themselves in competition with landlords and those looking to invest in properties, and the housing market is currently experiencing a serious case of greater demand than supply.
No new homes
Also absent from the Budget was any announcement to build new houses in the UK, which was rather concerning, considering that there are more people looking to buy houses than there are homes available. In their manifesto, the Conservatives promised that they would build an additional 200,000 starter homes specifically for those looking to join the property market, but there was no mention of putting these plans into action during the Chancellor’s speech. This could cause problems in the future if more new homes aren’t built to compensate for increased demand, although it may be something that is high on the government’s to-do list, particularly with all the encouragement to get on the property ladder.
As we said earlier, the emergency Budget didn’t really touch on the subject of housing, however this doesn’t necessarily spell disaster for those who are hopeful about taking out a mortgage. The old saying of no news is good news may apply here, as the lack of shocking announcements means that the government isn’t planning on halting or changing their current schemes that are helping first-time buyers get on the property ladder. Consider this something of a silver lining to the emergency Budget, as it shows that, along with a confirmed starting date for the Help to Buy ISA, the government is still focused on helping first-time buyers.
For many people, owning their own home is the ultimate goal to aspire to. However, and understandably so, rising property prices have put many people off – until now perhaps.
Figures from the Office for National Statistics have shown that the average house price growth in the UK is starting to slow down. The April 2015 House Price Index has indicated that the average price of a house increased by 5.5% in the year from April 2014. This rise was slower than the 9.6% average rise between the months of March 2014 and 2015. Those who are looking at taking a step towards buying their first home will be particularly cheered by this news, as it shows how average house price growth slowed across the majority of the country, particularly in London, where the average price increase dropped below the UK average for the first time in nine years.
While house prices in the UK are still far from ideal, the slowing of the average price growth may prompt a lot of first-time buyers to kickstart their efforts to get on the first rung of the property ladder. If you’re one of these fresh faced first-timers, then read on for our six tips on how to survive the house buying process for the very first time.
Save, save, save
All first-time buyers will already know that this is the main step towards securing the ultimate goal of owning your very own home, but we’re here just to re-iterate its importance. Of course, there’s the deposit for your house, but don’t forget about the other often hidden costs of becoming a homeowner. There will be conveyancing fees for the solicitors who sort out all the legal paperwork, paying for a survey (absolutely essential, to ensure the house of your dreams isn’t falling apart) and possibly stamp duty, if you’re buying a house that costs more than £125,000, and this list isn’t exhaustive! Very rarely can you come up with a fixed sum to cover your moving costs and then save this specific amount – it doesn’t work like that. There are usually costs that you hadn’t anticipated, and it’s best to be prepared by saving more than you think you’ll need.
Do your research
In today’s internet-fuelled world, you’ll find plenty of useful information provided by housing industry experts, mortgage advisers and other first-time buyers who’ve already trodden the path you’re now attempting to negotiate. Learn as much as you possibly can about all things mortgages and houses, including what the latest interest rates are, and what to look out for when you visit a house for sale for the very first time. There’s no denying that this is the boring bit, but it certainly is important. You wouldn’t go into an exam unprepared, so why enter the house buying process without being equipped with the knowledge to get you through it?
Keep it cool
Even if from the moment you step over the threshold you absolutely love a particular house, remember to keep your cool and not lose your head. Avoid thinking of it as your dream house and definitely don’t start measuring curtains in your mind or talking with your partner about where you think the couch should go. Not only will this give signals to the seller that you could be an easy win, but it will make it so much harder if you run into problems.
If you’re looking with a partner, friend or even a family member, make sure you have some time alone with them away from the seller or the estate agent to either look around yourself, or simply discuss your thoughts. Often, someone objective like a family member or friend can see things that you, blinded by first-time buyer excitement, may miss. You may not have noticed the damp in the master bedroom or even the fact that a busy bus stop is right outside.
Stick to your guns
This doesn’t mean you should snap your metaphorical wallet shut and refuse to even approach the asking price on a house, (this is no time to be cheap!) but don’t be afraid to do some good old-fashioned haggling when it comes to the price. Yes it may feel a little awkward but everyone does it; it’s just part of the process. If other houses in the area haven’t sold for as much or if the survey has revealed a few defects, then haggling is a must. Remember that this is the biggest investment you will make in your entire life, if you never ask you will never know! And if you have really fallen head over heels in love with a home, don’t give it up! Unless of course the ceiling is caving in, then maybe you should walk away.
Whether it’s the pride talking or our desire to not spend more on third-party help when we’re already spending so much, but many of us think we can do it all ourselves. Maybe you do have the wherewithal to negotiate a favourable price, do the research, find insurance and even do all the legal work, but let’s face it, many of us will need help. Speaking to a mortgage adviser is just one of the simplest steps you can take to ensure that your journey towards home ownership is as smooth as possible. They will help to find the right mortgage to suit your earnings and outgoings, and will guide you through the process from beginning to end.
Sure, going with your dad’s mate who once did a bit of conveyancing or doing it all yourself might save you some money, but how can you be sure that it will all be done correctly? Professional conveyancing solicitors will know exactly what needs to be done, and will know what red flags to look out for. They will conduct local authority searches to find out if a new motorway will go right by your new home, water and mining searches, they will check with Land Registry and legally negotiate with the other side. So yes, you may save a few quid by cutting back, but it probably won’t be worth it in the long run.
Don’t give up hope!
Every single person or couple who have ever bought a home will be able to tell you their own horror story about the process. We don’t say this to put you off; we tell you this so that you won’t give up when the going gets tough. Problems crop up all the time; from small hiccups like paperwork delays to larger issues like offer disagreements, but that doesn’t mean the whole thing will fall through.
The process of buying a house can be an unpredictable and often long one, with some people completing their purchase in just a couple of months, while others find that it can take up to a year to complete. But don’t give up! Remember that you’ve scrimped and saved for months, endured countless meetings and phone calls and viewed dozens of houses just to find this perfect one. Trust us, it will all be worth it in the end.
The dust has finally settled on one of the most unpredictable General Elections in living memory, which saw the first Conservative majority government for nearly 20 years. While issues surrounding the NHS and immigration were certainly hot on everyone’s minds, those with ambitions of owning their own homes one day will be wondering if the new government will be able to turn those dreams into a reality. The newspapers are always reporting about the “state” of the housing market with increased doom and gloom, which is no doubt putting off many people. In fact, a report by Halifax found that 21% of first-time buyers believe it will be “virtually impossible” for them to secure a mortgage.
However, contrary to what the doom-mongering national press would have you believe, numerous measures have been taken to help people gain access to a mortgage, and this was something that the Tories were keen to emphasise during their recent election campaign. With certain promises being made, let’s take a look at exactly what the new Tory government will mean for those property buyers who find themselves daydreaming of paint samples and carpet swatches.
Help to Buy Scheme
The first phase of the Help to Buy scheme was originally launched by the Tory-Lib Dem coalition government in April 2013, and was designed to help people get on the property ladder. The equity loan part of the scheme is where you can purchase a home with only a 5% deposit, and the government will lend you the remaining 20%. According to the Department of Communities and Local Government, 47,018 properties have been purchased through the Help to Buy scheme in the first two years.
The Loan Equity scheme was due to end in December 2016, but in March 2014 Chancellor George Osborne announced it would continue until at least 2020, which is great for those who are hoping to get on the first rung of the property ladder in the next few years.
New Help to Buy ISA
While the paperwork can be stressful and the wait can be agonising, often the most difficult part of buying your very own home is saving up for the deposit. Building up enough savings to lay down a deposit may seem like a breeze in your head, but in reality it can be like trying to climb Everest. In an attempt to boost the savings of those trying to buy their own home, the government has announced a new arm of the Help to Buy Scheme, called the Help to Buy ISA. From autumn 2015, hopeful first-time buyers will be able to pop down to their bank and open a new account.
All you will have to do from there is make regular monthly contributions to the savings account. There’s no minimum amount, but you can save up to £200 every month. The best part is that the government will boost your savings by 25%, up to a maximum of £3,000. That means that if you manage to save £12,500 towards your first home, the government will bump that up to £15,000.
A problem faced by many first-time buyers is that many are simply out of their price range, but in their manifesto the Conservative party pledged that they would build an additional 200,000 top-quality Starter Homes over the next five years. These homes would be reserved exclusively for first-time buyers under the age of 40 and would be sold at 20% less than the market value. For any young people looking to break away from renting and get themselves on the property ladder, with the view of moving into a bigger house in the future, keeping an eye on the building of Starter Homes in your area will give you an idea of when to kick-start the mortgage application process.
For every person looking to buy a house, the subject of mortgage rates will be of constant interest. The thought of rising mortgage rates can worry homeowners but prior to the General Election, David Cameron reaffirmed his pledge to keep mortgage rates low. He claimed that the historically-low national cash rate in Britain, which is set by the Bank of England and currently stands at just 0.5%, was due to the deficit reduction efforts of the coalition government. While those who are trying to boost their savings won’t be particularly amused, the idea of continuing low mortgage rates will be music to the ears of anyone looking to make a move up the property ladder.
What does this mean for me?
In a nutshell, the outlook appears to be brightening for first-time buyers! All of the government plans mentioned above have been designed with you in mind, and aim to get you onto the first rung of the property ladder. With youngsters now being nicknamed “Generation Rent”, it’s no wonder that the new Tory government is keen to give people enough support to free them from the clutches of landlords and help them to lay some firm roots.
Buying a house can be nerve-wracking and stress-inducing enough as it is, so making sure you gain as much expert help as possible can help to alleviate some of those feelings. Knowing that you have that extra little bit of support when it comes to saving and weighing up the best mortgage deals is invaluable.
Don’t be tempted to go it alone. There are plenty of excellent professional mortgage advisers out there who will give you the best possible advice. Just enter your postcode, and mylocalmortgage.co.uk will generate a list of trusted mortgage advisers in your area.
Buying a house is one of the most exciting times of your life – whether you’re making that first step on the ladder or climbing to the next rung. However it is also undoubtedly one of the most stressful.
From choosing the perfect home in the right school catchment area to getting the most suitable mortgage, there are numerous decisions to be made. And you can guarantee that everyone you meet will have their own story to tell and advice to give. Now, some information is helpful – the sort you receive from expert professionals – but other advice, though it might seem legit, is not always best heeded as you make this important decision.
Here are some of the common myths home-buyers hear and need to get the facts on before taking the plunge.
1. “Get the biggest mortgage you can’t afford”
This is a throwback from way back when property values were rising rapidly. Getting on the ladder invariably meant embarking on an investment that would grow considerably in the next few years and with wages rising year-on-year, if it was a stretch at first it would soon become affordable.
However, as we now know, it is not always guaranteed that wages will increase in line with inflation. Plus if you’ve taken on a huge mortgage to afford your dream home and recession hits, you could be left in a situation of negative equity. It’s a real risk to take.
Instead of taking on a massive mortgage you can barely afford, speak to your mortgage adviser about realistic borrowing based on your personal circumstances.
2. “You can’t get a 95% mortgage any more”
Granted, it is more difficult than it once was to get a mortgage of 95%. However there are schemes in place such as the Government’s Help to Buy, which aims to help more people become home-owners of new build properties. While this isn’t the traditional 95% mortgage, lenders are still required to find just a 5% deposit, while the government loans you the extra 20%. So you’ll only require a 75% mortgage.
On existing homes there is the option of the Help to Buy mortgage guarantee scheme, which offers lenders the possibility of achieving a high-loan-to-value mortgage of 80-95%. The Government offers lenders the option of purchasing a guarantee on the mortgage loan. The benefit? The potential to purchase a property with a small deposit but the potential for lower, more affordable monthly payments.
3. “The cheapest mortgage is the best option”
Yes, cheap is good, but when selecting a mortgage it is imperative you look at the bigger picture. A smaller monthly payment may look attractive but is it a fixed rate or a tracker mortgage? Tracker mortgages could shoot up quickly if base rate rises while fixed rates ensure your monthly payment stays within budget for a specified number of years.
It’s also a good idea to consider fees. Does your cheap mortgage come with an enormous arrangement fee? Is it really the bargain it looks like? Additionally, look into exit fees and early repayment charges – do they correspond with your plan for the property or will they cost you dearly when you come to move in a few years?
When it comes to mortgages, these are just a few of the myriad myths out there. The best place to ensure you are getting the full story is from an FCA-registered mortgage adviser.