Ballymena Guardian - Features - Buy-to-let mortgages

Features

Buy-to-let mortgages

Thursday, 15 December 2011

How people invest their money has changed markedly over time. There are those who prefer simple savings accounts that allow their cash to grow slowly over time, others prefer to look at a stocks and shares ISA in the hope that they may secure a greater return from dealings in the stock market. For others, the temptation was to move into property and the buy-to-let market.

Indeed, this trend seems to increasingly be the case. The Council of Mortgage Lenders (CML) revealed recently that in the three months to September 2011, the number of buy-to-let loans agreed increased by 16 per cent. As a way of investing cash, making money and developing a burgeoning property portfolio, the buy-to-let market certainly seems to be bouncing back after its 2009 slump.

How does buy-to-let work?

In essence, the buy-to-let market works by an individual, usually already a homeowner, deciding that they want to buy a property in order to rent it out to generate a monthly income. In some cases, wealthy individuals can afford the cost of the property in full themselves, but more likely is that they will seek to raise a deposit for the second home and take out a mortgage for the remainder.

Finding a deposit and a buy-to-let mortgage

Those with a significant amount of equity in their home, or who have finished paying for it, may decide to release some of that capital by looking at one of the remortgage deals available. This can release enough money to use on a deposit for a buy-to-let home, but when an individual remortgages it places additional importance on ensuring that the money generated by the second property is sufficient to offset this additional cost too.

Once a deposit has been found, which is usually between 20-40 per cent of the initial cost of the buy-to-let property, the next stage is to find a suitable buy to let mortgage for the property. There is a range of different financial products available for such a purchase, with fixed rate mortgages proving especially popular as they guarantee against any large increase in monthly repayments for the fixed term.

Selecting the right mortgage at this stage is critical and requires a good deal planning ahead. Some items that a potential buy-to-let homeowner needs to consider at this stage are:

Will the rental income cover your costs?

Most lenders suggest that for a successful buy-to-let enterprise, income from the property should meet 125 per cent of the costs incurred by it. Meaning that if you are paying £1,000 a month for all the costs associated with your buy-to-let property, that the minimum monthly rental income should be £1,250 a month.

What is my market likely to be?

You need to understand who is likely to rent your property, how much they are likely to pay and how quickly your property will be snapped up by a potential tenant. Completing thorough research of the market, choosing a promising area and ensuring that you understand who your prospective tenant is will ensure that your new property starts earning for you as expediently as possible.

Will there be additional costs that need to be met other than the original purchase to get the property into condition for letting?

If you buy a property that needs considerable work completing on it to make it suitable for the buy-to-let market then this must be worked into your long-term plan. Not only will this result in considerable financial resources being required as soon as you complete on the home, but also that your new property will not start earning for you immediately. Therefore, you need to ensure you have the capital available to ensure you can make the improvements needed, without putting undue strain on your personal finances.

The buy-to-let market has bounced back markedly in recent times as people seek to invest their money in bricks and mortar, however ensuring you choose the right mortgage deal and that you thoroughly research and plan your purchase carefully is still absolutely vital to ensuring your venture remains profitable in the long term.