All change on the Buy to Let bus!

Some investments become fashionable. I don’t know why, they just seem to reach the certain part of an investor that enjoys talking about them. If an anecdote about a new tenant can be thrown casually into conversation down the golf club or while sipping a free coffee at Waitrose, then all the better.

Buy to let property ticks the right boxes as one of these “vanity” investments and has done for a few years now. Don’t get me wrong, there are all manner of landlords out there, all of which have different reasons for becoming landlords. Even my mother became an accidental landlord well into her eighties when it became apparent that it was a way to help fund her care. What I am saying is that there is a certain type of investor who gets a boost to their perceived social standing through making certain types of investments. It is these people that tend to miss the early warning signs about the investment and only sit up and take note when the investment starts to cost them money rather than make them money.

We now have another warning sign for those people. Although, changes in the way income from buy to let properties are taxed have been flagged for some time, it is April 2017 that one of the most significant takes effect. After many years dealing with people who make “vanity” investments, I full expect this particular red flag to also be ignored and it will be the cold light of the actual annual tax return that will bring them up to speed. It will cost them a few quid by then.

So what has happened? Well, simply put, today marks the start of a process that will finish in 2020 whereby you will no longer be able to set the costs of a mortgage against the income gained from the property. The government website  sets out all the details of the changes, and if you have questions about your particular situation then I suggest you have a chat with your accountant sooner rather than later. Whatever your situation though, now is probably a good time to review whether or not buy to let is the right thing for you to do, or whether or not it is the right thing for you to continue doing.

As with any investment, it will only stand a chance of getting the result you want if you look at it coldly and purely in monetary terms. Buy to let is no different. The purpose of buy to let is to give you a return on your money. A return that at least outpaces inflation. In order to do that, you need to take into account everything the property is going to cost you, plus a guesstimate of what it may cost you. Here’s some pointers:

  • Costs of buying a property
  • Maintenance of the property
  • Risks
  • Tax implecations

A bit more detail…

I think everyone is aware of the costs of buying a property, deposit, survey, legal costs and, if necessary mortgage costs all have to be factored in. It is worth highlighting though that for Buy to Let, stamp duty is more expensive and most lenders have hardened their lending criteria so that the property needs to return a rent that will cover 145% of the mortgage cost, rather than the 125% that was used as a guide not that long ago. If you are getting a mortgage, then 75% of the value of the property seems to be the top end of what lenders will lend you. It goes without saying that the lower the mortgage required, the greater your chance of getting a decent return on your money. If you are looking at the top end of borrowing then you need to think very carefully about the real costs involved. Personally, there is no way that I would touch a Buy to Let investment if I had to borrow 75% of the property value.

Maintenance of the property is your responsibility, any repairs fall to you, as does insuring the property. These costs are unpredictable and can make a significant dent in your return

Other risks can include gaps in tenancy, or not finding a tenant to start with. You will still have to pay the mortgage even when the property is unoccupied. If the property is on a mortgage, then the rate can change. as previously mentioned, lenders have hardened their lending criteria in order to create a larger buffer between rental income and mortgage costs, but if interest rates rise the margins of return will become tighter.

This blog was triggered by the tax changes that come into force today, but paying tax on the income is just one element of your overall tax and financial situation. having a Buy to Let property will have implications on Capital Gains tax, Inheritance tax  and even your entitlement to certain benefits.

I know I have not mentioned the fact that the property is also a capital asset and as such there is a potential return to be had from its underlying value. it is true that the value of property has gone up, some would say by far too much, in recent years. The profit that can be made from eventually selling is something that has to be considered, as should the fact that there has been the odd property crash and the fact that it can take quite a while to find a buyer.

There is no doubt that having a property that you rent out can be a great investment, for the right people in the right circumstances and with the right understanding of the risks involved. If you are not that person, then having one because it makes you feel better is a potentially costly piece of self delusion.

 

What is a Second Charge?

Most of us are familiar with personal loans, credit cards and mortgages but a Second Charge loan may not be. As with most financial products, once you get beyond the jargon, it’s actually quite straightforward. A Second Charge is simply a loan that is secured on your property. This means that to be eligible you must be a property owner and that there must be enough equity in your property to secure the loan. The property does not have to be your main residence and can even be a commercial or Buy to Let property. The name “Second Charge” comes about from the fact that your mortgage is actually also known as a “First Charge”

Why Would I want A Second Charge?

There are a variety of reasons for considering a Second Charge. As it is secured on your property, the interest will be usually significantly lower than any unsecured debt you may have through personal loans or credit cards. Consolidating unsecured debt into a secured Second Charge will save you money, and sometimes quite a lot of money. However, never lose sight of the fact that once you have borrowed money using your property as security, then it is your property that is at risk in the event that you cannot make the repayments. Other common reasons for considering taking a Second Charge include meeting the costs of school fees, and tax bills, home improvements and deposits for other property as well as capital costs for you business. In this last instance, borrowing for business purposes is not something a normal mortgage will accept.

If you have a mortgage that has a favourable interest rate, or has penalties for early redemption, it may well make sense to take a Second Charge in order to secure further borrowing rather than remortgage your original loan.

Most unsecured loans are available up to certain limits, with the very top end being about the £35k mark. if you need to borrow more than this, then a Second Charge becomes attractive as the limit you can borrow is dictated by the equity in your property (as well as conditions relation to affordability) It is possible, though not always wise, to organise your borrowing so that the combined value of both your mortgage and Second Charge reaches 95% of the overall value of your property.

A Second Charge typically takes about three weeks from application to getting your money. Although I have been involved in mortgages that have been that quick, it is fair to say that on average a Second Charge will complete faster than a mortgage, and unlike a mortgage, there will not be any up front costs either.

As with all borrowing, you should carefully consider all aspects of what you are doing before you go ahead and ask as many questions as you can before signing. But, like most products, for the right person and the right circumstances, a Second Charge may well be a good idea.