Consumer Buy to Let Mortgage

Transcription

1 Cnsumer Buy t Let Mrtgage What is it? Cnsumer buy-t-let (CBTL) mrtgages are any buy-t-let cntracts that are nt entered int by an individual whlly r predminantly fr the purpse f a business. They are usually mre expensive than residential mrtgages. Cnsumer buy-t-let mrtgages are nly suitable fr peple wh have becme a landlrd by default as ppsed t making an active business decisin, fr example, where a prperty has been inherited r has been previusly lived in and the individual is unable t sell it, s resrting t a buy-t-let arrangement (BTL). Investing in prperty is risky, s yu shuldn t take ut a BTL mrtgage if yu can t affrd t take that risk. They are in many ways just like residential mrtgages, but with sme key differences: Interest rates n buy-t-let mrtgages tend t be higher The minimum depsit fr a buy-t-let mrtgage is usually a quarter (25%) f the prperty s value (sme lenders ffer deals with a 20% depsit, thers want a 40% depsit) The fees tend t be much higher The level f brrwing is typically based n the level f rental incme A 3% stamp duty surcharge applies, which applies t the entire purchase price f the prperty Mst BTL mrtgages are interest-nly, which means yu dn t pay anything ff the lump sum brrwed each mnth but, f curse, at the end f the mrtgage term yu need t repay the capital wing in full. Unlike btaining a mrtgage n a prperty yu wish t live in, BTL mrtgage lending is nt regulated by the Financial Cnduct Authrity (FCA). Repayment methd With repayment mrtgages yu pay the interest and part f the capital (the amunt yu brrwed) ff every mnth. At the end f the term, typically 25 years, prviding yu pay all mrtgage repayments due, yu shuld manage t have paid it all ff and wn yur hme. Interest nly With interest-nly mrtgages, yu pay nly the interest n the lan and nthing ff the capital. Althugh BTL mrtgages are typically n an interest nly basis, with the prperty being sld at a later date, with the ptential f generating sufficient mnies t fully repay the utstanding lan at the end f the term, the lender may require yu t have a repayment strategy in place s that yu have sufficient funds available t fully repay the lan at the end f the mrtgage term. Versin

2 Failing t maintain an adequate repayment strategy culd result in yu having difficulty in fully repaying the mrtgage capital at the end f the term. Yu shuld review the prgress f yur repayment strategy n a regular basis t ensure enugh capital is available when repayment becmes due. The mrtgage lender will als check during the term f the mrtgage that yur repayment strategy remains in place and still has the ptential t fully repay the capital brrwed. Current Accunt Mrtgage A current accunt mrtgage reduces the verall amunt 'wed' when yur savings r current accunt balance are taken int accunt. The mrtgage and current/savings accunt are nrmally cmbined int a single accunt, effectively acting like ne big verdraft. The lender nrmally stipulates a minimum amunt that needs t be left in the accunt each mnth t repay yur mrtgage ver the agreed perid. If there is a surplus, then yu will pay less interest and pay ff yur mrtgage early. Similarly, if yu leave less than the required amunt in the accunt, yu will end up paying mre fr yur mrtgage. A current accunt mrtgage als nrmally has the typical features f a current accunt such as a cheque bk, access via cash machines, direct debits etc. Offset Mrtgage An ffset mrtgage sees yur earnings paid in, permits verpayment, underpayment, lump sum depsits, payment hlidays and all the ther features f a flexible mrtgage, as well as giving yu a cheque bk, debit card and the facility t set up direct debits. Hwever, instead f cmbining all the accunts (current accunt, mrtgage and savings) int ne and having a single balance, the different cmpnents are kept separate, but wrk twards reducing the mrtgage debt. The three different accunts are nt usually charged at the same rate f interest, the lender charges a set rate f interest n the current accunt and the savings accunt OR will 'sweep' the marketplace and apply the best rate f interest that can be fund fr each particular cmpnent. The balance in the tw accunts is then added tgether and the ttal is then ffset against the mrtgage. Imprtantly, because yu're nt receiving interest n yur current accunt r savings there is n tax payable. Often, mnthly payments will remain at an equal amunt and 'verpayments' are used t reduce the verall mrtgage debt. This is hw yu can pay ff yur mrtgage early and save mney with an ffset mrtgage. Sme lenders will amend the mnthly mrtgage payment instead s that yu benefit frm lwer payments but, f curse, yu wn't be able t pay ff yur mrtgage early. Types f interest rate Fixed Interest Rate/ Stepped Fixed The mrtgage has a fixed mrtgage interest rate, s yu pay a set amunt each mnth fr the duratin f the fixed perid. This allws yu the security f knwing yur exact mnthly cmmitments in the early years f the mrtgage, unaffected by changes in the underlying interest rates. If interest rates fall belw the fixed rate yu will, hwever, cntinue t pay the higher, fixed amunt. Versin

3 Variable Interest Rate The mrtgage has a variable interest rate which can rise and fall in line with market cnditins. This des invlve a degree f uncertainty as yur mnthly repayments can vary and increase but will allw yu t benefit frm a fall in interest rates. Discunted Variable Interest Rate The mrtgage has a discunted variable interest rate. This des invlve a degree f uncertainty as yur mnthly repayments can vary and increase but it allws yu t have a discunt n yur mrtgage payments fr a specific perid and t minimise yur mnthly payments, it als allws yu t benefit frm a fall in interest rates. Tracker Mrtgage The mrtgage has a tracker interest rate. This means that the interest rate is linked t the [Bank f England Base Rate/LIBOR] and is equivalent t that rate plus a certain percentage. This des mean that yur mnthly premium may vary and can increase and therefre invlves a degree f uncertainty, but this des allw yu t benefit frm a fall in interest rates. Capped Rate The mrtgage has a capped interest rate which means that the lender has put a cap n the maximum interest rate that can be charged. It prvides the security f knwing that yur mnthly repayments will nt rise abve a certain amunt, whilst allwing yu t benefit frm any drp in the rate belw the cap. Eligibility Mst lenders will expect yu t wn yur hme, whether utright r with an utstanding mrtgage and yu must have a gd credit recrd and nt be stretched t much n yur ther brrwings such as any existing mrtgage(s) and credit cards. Yur earnings will als be taken int cnsideratin and if they are less than 25,000 a year yu are likely t find it harder t get a buy-t-let mrtgage. Yu will need t prve yur incme, and shw the lender evidence f any utgings, including debts, husehld bills and ther living csts such as clthing, childcare and travel csts. Lenders will have their wn upper age limits - typically between 70 r 75. This is the ldest yu can be when the mrtgage ends nt when it starts. Fr example, if yu are 45 when yu take ut a 25- year mrtgage it will finish when yu re 70. The maximum yu can brrw is linked t the amunt f rental incme yu expect t receive. Lenders typically need the rental incme t be a quarter t a third higher than yur mrtgage payment (25 30%). Taxatin If yu are cnsidering using a limited cmpany t purchase a buy-t-let, yu shuld seek prfessinal advice frm an accuntant. Versin

4 If yu sell yur buy-t-let prperty fr prfit, yu will need t pay Capital Gains Tax if yur gain exceeds the annual Capital Gains Tax threshld. Als, rental incme that exceeds yur mrtgage interest payments and certain allwable expenses 1 are liable t Incme Tax. Risk Cnsideratins There are a number f risk cnsideratins that need t be taken int accunt. It is imprtant that yu are aware f these. Buy-t-let carries with it varius risks such as finding tenants, checking tenants references, ensuring rental payments are received n time, understanding legal respnsibilities, maintaining the prperty and if necessary, using an apprpriately qualified managing agent. The payments shwn within the relevant prduct disclsure dcument(s) prvided, culd be cnsiderably different, and higher, if interest rates change. In the event that yur incme falls, yu will still have t make yur mrtgage payments. If yu can t find tenants r if yu can t charge the level f rent yu expected yu may nt be able t cver yur mrtgage repayments. Regular rental incme is nt guaranteed yu may have perids where the prperty is vacant. Yur prperty may be repssessed if yu d nt keep up repayments n yur mrtgage. Yu will still have t pay yur mrtgage if yu lse yur jb r illness prevents yu frm wrking. Think abut whether yu culd d this. Yur mrtgage may have early repayment charges which may result in a penalty if yu d nt want the mrtgage any mre. The amunt f rent yu can charge varies accrding t a number f factrs utside yur cntrl i.e. typical rental levels / demands within the prperty s lcality. If yu elect t have an interest nly mrtgage, the lender may seek details f a repayment strategy yu intend t use t repay the mrtgage at the end f the term (as ppsed t selling the prperty in the future t repay the utstanding lan). If relevant, yu will need t cnsider the csts f any such repayment strategy. In additin t the actual mrtgage repayments, yu will als need t cnsider a range f ther likely utgings, including: Letting agent fees (if yu decide t use ne) Maintenance / repair csts Annual safety checks Landlrds insurance Rent insurance Incme tax 1 Frm 2017, the amunt sme landlrds can claim in tax relief n their finance csts such as mrtgage interest payments, interest n lans t buy furnishings and fees incurred n taking ut and repayment mrtgages is being gradually reduced ver 4 years Versin

5 The affrdability assessment we have undertaken at this time is based n current interest rates, which may rise in the future, and n yur current circumstances, which might change in future. The relevant prduct disclsure dcument(s) shuld be read and understd fully. If all relevant infrmatin has nt been disclsed accurately and hnestly, this may result in any mrtgage cntract ffered, becming invalid. The value f the prperty may g dwn, leaving yu with ptential negative equity. Versin