Advice to help you structure finances ahead of investment
An investment property is a high-value purchase, and not many people have the funds available to buy in cash. Therefore, the majority of property investors buy property with the aid of a buy-to-let mortgage. Using financing to invest in property also means you get to take advantage of the benefits of leveraging in property investment – you make money using other people’s money. By investing with a mortgage, you could achieve a spectacular real yield on your investment money.
In this article, you’ll find out about the added costs of investing using a buy-to-let mortgage.
How much can you borrow to invest?
Although buy-to-let mortgages work in a similar way to mortgages for homebuyers, there are some key differences. Perhaps the biggest of these is the criteria used to assess whether the lender will advance money to you.
When considering if you are a good risk as a buy-to-let investor, the lender will look for a comfort factor called the interest coverage ratio (ICR). They will want the comfort that your rental income will cover the mortgage interest, and then some on top.
Typically, the lender will require an ICR of 125% – for every £100 of monthly mortgage interest payments, they will want you to be receiving £125 in rental income. Some lenders ask for an ICR of 140%.
You can learn more in our article ‘How will you be assessed for a buy-to-let investment mortgage?’
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Fees you might be charged on buy-to-let mortgages
Homebuyers will know that there are fees to pay when you take out a mortgage to buy property. When you invest in property many of these fees are the same, though you may find they are marginally more expensive. They can add as much as 0.5% to the headline mortgage rate. Here are the charges and fees you may be asked to pay when taking out a buy-to-let mortgage.
· The lender’s arrangement fee
Almost half of the buy-to-let mortgages incur a lender’s arrangement fee, which is fixed at a flat rate. Typically, this is around £1,500.
However, around a third of buy-to-let mortgage lenders charge a percentage of the loan amount rather than a flat fee. This can vary from lender to lender but is usually in the range of 0.5% to 2% of the loan.
Most lenders will allow you to add their arrangement fee to the mortgage – if you do this, you will pay interest on it and your cash flow will be marginally worse because of the extra interest.
Around one in six buy-to-let mortgage products are free of arrangement fees.
· Valuation fees
When you invest in a buy-to-let property, the lender will want to know that it is getting value for money. If you default on the loan, the lender may need to repossess and sell the property to recoup what you owe them. It could not do this if you borrow more than the property is worth.
To ensure that the property is worth what you say it is, the lender will insist on a valuation. And they’ll make you pay for this, either by charging you directly or via the mortgage broker. Many lenders charge valuation fees according to the value of the property.
The valuation fee may also include a charge for administration.
· Administration fees
These are charges that the lender might make for doing all the paperwork associated with the mortgage offer. Sometimes they are included in other charges and fees (such as the valuation fee). The amount of these fees varies between lenders.
· Booking fees
Some lenders charge a booking fee, payable when you are accepted for a buy-to-let mortgage. This secures the funds for you at the interest rate agreed. Such a fee is usually payable separately when you submit your mortgage application and is non-refundable; if you decide not to go ahead, you will forfeit this fee, which is typically in the region of £200 to £500.
· Legal fees
While not directly associated with the mortgage, it is worth mentioning the legal fees that you will need to pay. Your solicitor will do the conveyancing of the property, including local searches and registering with the Land Registry. Often the lender will use the same solicitor.
You will need to pay the legal fees as they are charged and as required by your solicitor.
· Stamp duty
When you invest in property, you will be required to pay stamp duty and a stamp duty surcharge of 3%. The amount you pay depends upon the value of the property you are buying. As an indication, if you are buying a property valued at £300,000, you will be required to pay a total of £14,000 in stamp duty. This must be paid within 30 days of completion.
Find out more in our article ‘6 Stamp duty questions all property investors need answered’.
· Mortgage broker fees
If you use a mortgage broker to secure a buy-to-let mortgage – and we highly recommend you do – you may have to pay for their services, too.
You shouldn’t underestimate the amount of work that a mortgage broker does, and the knowledge and experience they bring to the table. They spend a considerable amount of time finding you the best mortgage, saving you both time, aggravation, and potentially a significant amount of money.
They will ensure that your mortgage application progresses smoothly, liaising with you, your solicitor, and the lender.
Mortgage brokers may charge you a fee for their services, and they may also be paid commission from the lender.
How do you know what the fees are?
You should never walk into a black hole of fees and charges when investing in property. They must be declared up front, though, of course, these will first be estimates until the exact mortgage size and conditions are known.
For the most part, these fees and charges are no different than those you’ll be expected to pay when buying your own home. The real difference is that by investing in property, you are making a purchase that has the potential to pay for your home, instead of working all hours to do so.
To discover how investing in property could change your life, contact Gladfish today on +44 207 923 6100 and book a strategy consultation. We’ll help you assess the cash flow and capital growth potential from a range of investment opportunities.
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