Buy to Let Mortgages
The future of buy to let mortgages has been shaky since the start of the economic downturn, with some reports saying that overall, the value of the buy to let mortgage market decreased by half in 2008. New lending for buy to let properties dropped back to the same levels as 2003 levels in 2008, according to the Council of Mortgage Lenders in 2009.
Why Buy to let?Some pundits are forecasting a recovery in 2009/10 and saying that even in a recession, property can still be an excellent long-term investment, pointing to the fact that in the past 25 years profits from the property market have exceeded all expectation, especially in the south east of England.
With the decrease in value of shares and pensions, plus the abolition of many final salary schemes, it’s becoming more popular for people to invest money into a buy to let property as security for their retirement, hoping that the rent will provide an income, or under the right circumstances that the property can be sold on to make a profit at a later date.
When you apply for a buy to let mortgage, the lender can take into account any rent you expect to earn from the property, as well as any extra income from the day job. You’ll have to shop around, because some lenders actually base the whole decision on whether they will loan you the money on the forecast rental income. Also, if you have an existing mortgage on a property you live in, it reduces the amount you can borrow under a buy to let mortgage.
Is it Expensive to Buy to Let?Overall, even if you can still find a good deal, it’s more expensive to buy to let given the risk factors involved in not being able to find a tenant to cover the rent. You’ll often find that buy to let interest rates can be a full percentage higher than normal residential rates. The deposit is often higher too, and with mortgages already being harder to come by, you’ll be looking at a deposit of at least 20% of the value of the property, if not more.
Don’t forget that you’ll also have to pay the costs of the building survey and all the legal fees, and if you’re buying a leasehold property, there may well be service charges too.
You’ll have to factor in the cost of insurance too - standard buildings and contents insurance as well as insuring yourself against loss of your income if you can’t get a tenant, plus the cost of any damage the tenants cause and the legal costs of any eviction proceedings.
Covering the Cost of Non PaymentsAlong with residential mortgage arrears being on the rise, the situation in the private rented sector is not looking good, as many landlords are defaulting on mortgages due to tenants not paying their rent.
Insurance companies are taking the opportunity to offer new products to suit the economic climate, like tailored rent guarantee insurance which is designed to protect landlords from the stress of dealing with rent arrears – and the associated legal costs of eviction or court proceedings for rent recovery as a result. The premiums for this type of rent guarantee insurance vary a lot – and depend on the type of property and the deemed insurance risk, but it’s worth considering if you’re taking on tenants in an uncertain financial climate.