LANDLORDS coming to the end of cheap two-year fixes face payment shocks of
almost £300 a month on a typical £150,000 mortgage, as house prices fall and
lenders pull their competitive deals.
The number of buy-to-let mortgages shrunk by almost a third in a single day
last week following the withdrawal of Bradford & Bingley, formerly the
UK’s biggest lender to landlords, from the market. UCB Home Loans and The
Mortgage Works, both owned by Nationwide, followed suit. Nationwide said it
was a temporary measure as they were inundated after B&B’s demise. It
expects to resume business for new customers within days.
Others lenders such as Woolwich, owned by Barclays, have increased rates by up
to 0.5 percentage points.
Melanie Bien of Savills Private Finance said: “Landlords coming up to
remortgage will find the mortgage market less welcoming than before . . .
there is less choice, higher rates and tighter criteria.”
Here we offer some tips to survive the buy-to-let mortgage meltdown.
SECURE A BETTER DEAL
1 If you took out a fix with a 15% deposit two years ago, the best deal
would have been from The Mortgage Works at a rate of 4.89%. On a typical
£150,000 mortgage, for a property valued at £176,000, your monthly payments
on an interest-on-ly basis would be £611.
However, over the two years average property prices have fallen by around 4%,
according to Nationwide. Someone coming to the end of the above deal would
have a mortgage debt of £150,000 against a property valued at about
£169,000, leaving them 11% equity for remortgaging.
However, there are currently no buy-to-let deals available with such a low
deposit. You would need to raise at least £6,350 to get the minimum 15%
deposit required.
If you managed to do this, NatWest offers a two-year fix at 6.89% with a
£1,499 fee. An interest-only deal would cost £861 per month – a payment
shock of £250.
If you are unable to find the additional deposit, you will be stuck on The
Mortgage Works’ standard variable rate of 7.24%, giving you a monthly
payment of £905, or £294 more than you paid on the fix.
You could get a better deal with a larger deposit, say by releasing equity
from the home you live in. If your home is worth £300,000 and you release
£50,000 using a best buy two-year fix such as Principality’s 5.99% deal with
no fees, you would pay £249.58 a month. This assumes you have no other
mortgage on this property.
By using the £50,000 as a further deposit on the buy-to-let mortgage, you
would reduce your outstanding loan amount to £100,000, giving you a better
loan to value ratio of 59%. This would give you access to some of best deals
such as the Cheltenham & Gloucester (C&G) two-year fix at 5.74% with
a 2% fee (£2,000). The monthly interest payments would be £478.33 per month.
FIND A MORE RELAXED LENDER
2 Most lenders require that you cover at least 120%-125% of mortgage
interest payments with rental income. But some lenders will offer different
methods of calculating this.
Richard Morea of broker London & Country said: “Lenders such as C&G,
who can consider both earned and rental income [minus outgoings] in their
calculations, offer a valuable alternative where rental income alone does
not satisfy lenders.”
If you have a property valued at £250,000 with a mortgage of £150,000, you
could apply for a C&G two-year fix at 5.74%. This will cost you £717.50
a month in interest. If we assume rental income of £800, you would not
qualify for the deal using a traditional calculation as 120% of mortgage
payments would require income of £861.
If you had income of £60,000, a £150,000 mortgage on your own home, and
another £100 per month outgoing on bills, then C&G would still lend
the required amount for the deal. In fact, they would lend up to £211,000 on
this basis, according to L&C.
RELIEF ON ENERGY EFFICIENCY
3 From the start of this month landlords have been required to present
EPCs, the certificates which tell prospective tenants how energy efficient a
property is. Though you may not be able to boost rents by having a more
energy-efficient home, your property would be more attractive with a lower
EPC rating.
You can get tax relief on up to £1,500 spent on energy efficiency measures
such as loft and floor insulation. You can obtain an EPC for about £100 from
an energy assessor (hcregister.com) or your letting agent. It will be valid
for 10 years.
NEGOTIATE ON THE RENT
4 Rental income is increasing as more people put off buying a property.
Rents were 9.3% up in June this year compared with June 2007, according to
figures from mortgage provider Paragon. However, many landlords are failing
to take advantage of this.
Steve Bolton of Platinum Partners Group (PPG), an adviser, suggests you
“price-test” your rental income every 12 months. He said: “If your property
is always rented in record time, with no price objections, this is a sign
you may be able to increase rents.”
ALTER YOUR TARGET MARKET
5 You could convert a living room into another bedroom and so boost
your rental income.
Doing this would cost you around £2,000, including new furniture, according to
Sarah Walker, a buy-to-let investor who also works for PPG. However, you
could get an additional £100 a week in rent depending on where the property
is located. On this basis, you would have covered the cost of conversion in
around five months.
You may need to obtain a house in multiple occupation licence from your local
authority, which lasts for up to five years. Fees range from £300 to £1,100,
according to consumer watchdog Which?
GET THE RIGHT TAX RELIEF
6 You can claim tax relief on a number of expenses including
let-ting-agent fees and insurance. You can also deduct costs involved in
maintenance such as replacing a leaking pipe. However, “improvements”, such
as upgrading a kitchen cannot be deducted.
You can claim for furnishings although there are two ways of doing this.
Option one is to claim wear and tear at 10% of the total rental income you
receive. The alternative is to claim the cost of replacing old items minus
any money you receive from selling the old items.
GO FOR INTEREST ONLY
7 Buy-to-let borrowers get tax relief on their mortgage interest
payments. To maximise the tax break, it is advisable to go for an
interest-only rather than a repayment loan.
Mortgage payments will also be lower. If you have a two-year fixed mortgage of
£150,000 at 5.99%, you would pay £748.75 per month with interest-only
payments but £965.54 on a repayment basis.
For tax purposes, you can offset all of the interest-only payments against the
rental. So if the rental income is £1,100 per month, you would only be
liable for tax on £1,100 minus £748.75 or £351.25 –£140 as a higher-rate
taxpayer.
With the repayment deal, you can offset the interest part of the payment but
not the capital. It means that for the first few years, when most of the
repayments go on interest, you will be tax exempt for a similar amount in
the same way as with an interest-only deal.
However, you will have higher monthly repayments.
As you pay off more of the capital, and less of the repayments count as
interest payments, the more the tax benefits diminish.
BEWARE THE TAXMAN
8 The taxman has warned it will crack down on landlords who claim tax
relief on interest and capital payments on a buy-to-let mortgage.
Powers coming into effect next April will give tax officials the right to turn
up and inspect landlords’ records in their home, according to accountants
Grant Thornton. You can find out what proportion of your mortgage repayments
relate to interest payments by asking your lender for a statement.
SHOP AROUND FOR INSURANCE
9 Kate Faulkner of the property advice website designsonproperty. co.uk
suggests you take out rent-protection cover. This will cover any short-falls
in rent if an occupant is unable to pay.
Rates can vary widely. A three-bedroom terrace in Leeds would cost £144 a year
with Endsleigh but £263 with Zurich, according to comparison firm
Moneysupermarket. Belvoir, though, offers this for £99 a year.
CUT OUT THE MIDDLEMAN
10The cost of using an agent for full management of your portfolio is
about 12% (or 15% in London) of your rental income, Faulkner said, so you
could manage it yourself.
The disadvantage is you will not have the same advertising exposure. You won’t
be listed on property website Rightmove, for example. You will also have to
ensure you comply with regulations. You will need a gas safety certificate
if there is gas and a Corgi-registered engineer must provide this. Costs
vary from £35 to £100.
