by Mark Johnston
To make the most of a buy-to-let investment you need to thoroughly understand the state of the housing market. Before choosing a property and arranging the finance to purchase it there are a number of factors to look into.
Research should be undertaken into where you want to buy your property, the best areas and types of properties to invest in, you do not want to buy a 2 bed roomed cottage in the middle of nowhere when the majority of today’s tenants want a city centre flat for instance. This research can either be undertaken by yourself or by asking a specialist letting agent.
Bargain properties can come up in all sorts of towns and cities, however purchasing a buy-to-let property because it is cheap does not necessarily herald a wise investment.
A common mistake for novice investors to make is to buy a house that they would like to live in rather than choosing a location and property that will provide the best return. Therefore choose a property in a good location with a range of local amenities and access routes. Putting the addresses through the google search engine will help to provide more information, also check out average local rents on similar properties, you need to be competitive and not over price yourself.
Although the buy-to-let market seems to have improved acquiring finance can still be a challenge. There are all sorts of considerations you need to bear in mind when it comes to applying for a buy-to-let mortgage, one of these is that the amount of rent you charge should be more than you pay out in repayments, making sure a profit is made and also ensuring all other costs are covered. Lenders want to establish the property is a good long term investment. Depending on the rental income of the property will determine the amount you can borrow, lenders generally work at approximately 125% coverage of the mortgage interest and interest rate charges are roughly 1% higher than the residential market.
According to David Hollingworth of the mortgage broker London and Country “a few lenders may stretch to 80-85% loan to value but in most cases the investor would need to put up a 25% deposit. Most buy-to-let mortgages require a deposit of around 15-25% of the property value. The more appealing rates may only be available to those investors who are only looking to borrow around 60% or less.
For new mortgage lenders to ignore your existing mortgage the rent received would have to fit the new lenders buy-to-let calculations. An example of this would be if your existing mortgage balance was £75,000 this is the times by the mortgage lenders variable rate (in this case 6.75%) giving £5,063 this is then divide by 12 (calendar months) giving £421.85 this is then times by 118% giving £497.25 meaning the rent required in this particular case would be £498.00.
Another factor to consider would be arrangement costs as these can also be particularly steep, lenders offering flat fees can demand up to £2000 or as much as 3.5% of the mortgage required. There is however plenty of competitive deals around that are specifically aimed at the buy-to-let market.
Therefore before applying for a buy-to-let mortgage work out a realistic comprehensive estimate of all the figures and costs involved, giving you a clearer idea of how much you could borrow and whether you will be able to overcome the financial risks involved.
Story link - Part Three Buy to Let – Finding a Property
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