Delia Says: Assessing Dave and Linda’s buy-to-Iet options are Mike Fitzgerald of Brentchase Financial Services and Andrew Moss of Mortgage Express. Have you got a problem for Delia? Email mortgage.strategy@Centaur.co.uk
Mike Fitzgerald is sales director at Brentchase Financial Services
Dave and Linda are part of an increasing band of investors who see buy-to-let as a good investment.
Over the past few years we have seen this market grow, and with the changes in SIPPs due next year this seems like a good time for them to expand their portfolio.
They have an existing portfolio and their first step would have been to conduct a fact-finding exercise to assess the total values and borrowing on their buy-to-let properties. Also, it is important to check to see if there are any redemption penalties.
It might be possible to equalise the loan to value on all of the existing properties and raise money from these properties to put down a large deposit on their next purchase. In turn this might allow a lower interest rate on the new mortgage.
Quite a few lenders will allow all the properties to be included under a portfolio scheme and it will depend on the interest rate and total charges whether this is worthwhile.
Buy-to-let rates at the moment are competitive. If we forget the ever-increasing arrangement fees for the moment, there are some good deals available.
Derbyshire has some low euro LIBOR rates available starting at 4.39%, and it will allow a maximum of 10 properties with a total exposure of 5m.
Other lenders with good buy-to-let offerings include the likes of Mortgage Express, BM Solutions, Platform and GMAC-RFC. If rental calculations are a bit tight they could use GMAC-RFC which can use a 100% calculation at base plus 1%. If David and Linda are really serious and want to expand their portfolio, GMAC-RFC will allow up to 25 properties with borrowing up to 3m.
Many people are becoming disillusioned with their pension plans and are looking for other areas in which to invest. Buy-to-let seems to offer a good long-term solution.
But one word of caution for prospective buy-to-let home owners – they must take into account the fact that there are likely to be rental voids. These, along with interest rate changes, can distort the expected profit margin.
With careful management and planning, buy-to-let can be a good source of income and profit for the medium to long-term landlord. This, coupled with the changes in pension rules next year could herald a bright, new dawn for serious investors.
Andrew Moss is product development manager at Mortgage Express
Assuming Dave and Linda have set an objective of adding three more properties to their portfolio at a cost of, say, 200,000 each, there are a number of options available to them depending on how they want to structure their portfolio.
Typically they will need a 15% deposit for each property. This means a total of 90,000 for three properties valued at 200,000 each.
There are some buy-to-let products available whereby lenders are prepared to advance up to 87% or 90% of the property value but these are likely to be priced at a premium. Since Dave and Linda wish to keep costs to a minimum and can make use of the equity built up in their existing portfolio to provide a significant deposit, these products may not be the most appropriate for their purposes.
By partially or fully remortgaging their existing portfolio Dave and Linda will be able to find the money needed to cover the deposits. They might also wish to borrow an extra amount to cover fees – which can add up to a considerable amount -unless they have savings which could be a more suitable source of funds.
To maintain low costs the couple may wish only to remortgage one property to avoid repeat payment of fees. This will be dependent on their having 90,000 in equity on one property at, typically, 85% LTV.
If they need to remortgage two or more properties to hit their target they could consider fees-free remortgage deals. But the reduction in one-off costs could well be offset by higher monthly payments in the long term.
Dave and Linda should also consider the effect of any early repayment charges, which again can add up to a tidy sum.
For new purchases, Dave and Linda will find some excellent buy-to-let deals available. A recent market development has been a move toward fixed rates over three to five years at pay rates as low as 4.69%. The potential problem here is that these deals tend to have higher initial fees, typically 1% or over. If the initial cost is prohibitive for the couple, fixed rates at three to five years are still available at 4.99% with lower fees.
Competitive discounted or tracker rates will enable them to take advantage of any base rate cuts. They could also consider taking out a limited company buy-to-let mortgage which could maximise their tax efficiency in the longer term.
A qualified mortgage broker should be able to help this couple take advantage of a competitive buy-to-let mortgage market.