Getting your sums right before you begin is the key to minimizing risk when buying an investment property
Of all those hit by the credit crunch, property investors have suffered some of the heaviest blows. These days, the old property market adage that there is never a wrong time to buy and always a right time to sell has a hollow ring to it. Successful buy-to-let investors are in this business for the long term. In the post-credit crunch property market there is no quick fix, no fast buck, no cast iron guarantee of a steady income stream. Nor will there be for some time to come.
Without doubt, bigger deposits are demanded by all lenders. Think in terms of a sum between 25% to 30% of the property's value. As with deposits, so with lending fees. These have rocketed since the credit crisis. Expect to fork out up to 3% of the sum you’re asking to borrow.
When approaching a potential lender, remember the principal difference between a buy-to-let mortgage and a residential loan is that with buy-to-let the lender makes a decision on the property's income potential. Your income, age and credit-worthiness are less relevant; it’s the property you want to let out that’s under scrutiny. The lender will be assessing how much rent the property should generate. The credit crunch has made the rental calculation pretty well non-negotiable. Typically, the monthly rental income must cover 125% of the monthly mortgage repayments. So, for example, a property is worth £275,000 which you pay for with a 30% deposit. The borrowing sum therefore, is £192,500. The mortgage offer is pinned down at 5.29% interest. A lender calculates by multiplying the loan by 125% (£240,625) then multiplying the total by the interest rate (£12,729), after which that sum is divided by 12. And it's this total which gives the rent which must be earned each month. So, with this example a monthly rent of £1,060 would be required.
As for the best lenders and the bargain offers, MoneyFacts' current buy-to-let tables show a range of deals on offer with standard variable rates anywhere between 2.99% (Bank of Scotland International - maximum loan to value 50%) and 6.54% (Nottingham BS maximum loan to value 65%).
My final tip is this: before signing on the bottom line of a new loan agreement, be sure to thoroughly investigate all the terms and conditions of the offer on the table and be clear about early redemption fees, charges and/or remortgage costs.
Expat Money: The Definitive Personal Finance Manual for Brits Abroad by Hannah Beecham and published by Summersdale, price £8.99, is available from www.summersdale.com, all good bookshops and internet booksellers.
