Buy To Let

Should I choose interest only or repayments on a Buy to Let mortgage as a CIS worker?

Traditionally, most landlords have gone for interest only, which means that they’re only servicing the interest every month. I’m not giving advice here, that’s just what most would do.

But on a repayment mortgage, you’re making a monthly payment towards the capital and the interest. At the end of the mortgage term, there is no capital left to pay.

What you choose is very individual. I would be asking my client if they are happy servicing the interest, knowing that the capital is not reducing? When the mortgage lender wants their money back in 20 or 30 years, will you sell the property – hoping there’s enough to pay back the debt?

Ideally that property will have gone up in value and a little will be left for you too. The important thing is to recognise that properties don’t always go up in value.

The alternative is to pay capital and interest. The monthly payments are going to be more expensive, but you’ve got the comfort of knowing you’re reducing the mortgage loan. It’s going to depend on the individual needs of the borrower. It’s not for the advisor to say what’s better.

What are the implications of recent tax changes on Buy to Let mortgages?

I’m not a tax advisor. I’m not trained in tax and I can’t give tax advice. What I can say, though, is that there are differences in buying a property in personal names as opposed to buying it through a limited company.

A few years ago, you could offset the interest element of your mortgage payment as a business expense, or it would come off your tax bill. That’s no longer the case.

Effectively, if you’re doing your own self-assessment, you will be paying tax on the entire annual rent according to whether you’re lower rate, higher rate or additional rate. Tax credits can be applied, depending on your tax threshold, which I’m not going to go into because I’m not tax trained.

The bottom line is that because of the changes in how Buy to Lets are taxed, it has hit landlords in the pocket quite a bit because tax bills are generally higher than they were.

It’s different if you’re buying it in a limited company, as company tax rules apply. If the company is making a profit, it would pay corporation tax. If you’re drawing the money out of the company as income, again that’s down to your accountant, but you might be drawing that as salary, dividends or a combination of the two.

It’s taxed differently. That’s not been impacted by changes to taxation on Buy to Let.

Are there any restrictions on using a Buy to Let mortgage for properties in certain areas or for specific tenant types?

If it’s in a flood area, you’re probably going to struggle. Likewise, if you’re trying to get a Buy to Let mortgage for properties that are going to be used for asylum seekers or are funded through the local authority, that can be a little bit more restrictive.

You need to speak to a specialist broker on that – like myself.

Are there any government schemes or support available specifically for CIS Buy to Let investors?
No, we don’t expect the government to help any landlords at the moment.

Can you discuss the importance of property management and its impact on Buy to Let mortgages?

Mortgage lenders couldn’t care less whether you’re going to manage it yourself or whether you’re doing it through an estate agent. They might factor in an estate agency charge into the affordability model. It’s rare, but I’ve seen it.

If this is your first time letting out a property and you’re totally inexperienced, you might be better off doing your first one or two through a reputable, registered letting agency. ARLA is the Association of Registered Lettings Agents and can give you some assistance on this.

Of course you’re going to be paying a management charge for that, but it takes away some of the headache.

As you become more experienced, you might decide to increase your profits and reduce your cost by cutting out the estate agent and doing it yourself. It comes down to the individual, your level of experience and your attitude towards risk and headaches. If you don’t mind being called at midnight to go out and change a light bulb for your tenants, then fine.

What are the consequences of defaulting on a Buy to Let mortgage? What are the potential risks involved in investing into Buy to Let properties?

If you default on your Buy to Let mortgage, the lender is going to take your property away. They might give you one or two months to catch up with the mortgage payments and come to some kind of arrangement.

But if you just bury your head and default on the payments, the lender will simply repossess the property. That is a risk because if the lender wants to sell it fast. They often sell it through auctions. If it doesn’t achieve enough to cover the debt you owe, even if the property is gone and you’ve handed back the keys, the lender can still chase you for the rest of the money.

The obvious risk with Buy to Let is that you’re investing in something and property values can go up or down. Generally if you hold on to something for long enough, you’d like to see increased value, but it doesn’t always happen.

In pockets of the UK I’ve seen properties reduce in value in recent years. There are some areas of the north west, for example, that are not quite so desirable and property prices have fallen. In that situation, when you come to sell it, you may not cover the debt owed.

Can you explain the process of adding additional properties to an existing Buy to Let portfolio?

Applying for the mortgage is entirely the same, apart from the new mortgage lender would want to know the details of any other properties.

If you’ve already got a few properties in a portfolio and you’re applying for another one, the lender will invariably ask you to fill out a spreadsheet stating the lender, the address, how much you owe, the rent you get, the mortgage payment, type of property and whether it’s owned in personal name or company name.

If you have more than four properties, or this one will be your fourth, all lenders would consider you to be a portfolio landlord. They then do some additional stress test calculations and rental coverage calculations to your entire portfolio, to make sure you are not over exposing yourself to risk.

It’s a lot to manage, especially if the economy turns and suddenly all your tenants walk out or don’t pay. Mortgage lenders might like to see a backup plan – maybe some savings to cover rental voids.

What steps should a first-time CIS Buy to Let investor take before applying for a mortgage? Any top tips here?

Top tips would be to research your area. Make sure there’s an appetite for the property that you’re buying.

If this is your first one, don’t buy a property to redevelop – you want something nice and straightforward, first time. Make sure it’s mortgageable and can be let out immediately. It doesn’t matter if it’s got an aubergine 1970s bathroom suite. These are superficial things.

What we don’t want is a property that’s been repossessed and the previous owners ripped out the kitchen, the toilet and the boiler. You’ll struggle to get a mortgage on that. There’s other ways to finance it, but I wouldn’t advise it as your first Buy to Let investment.

Speak to at least three estate agents about what sort of property to buy – are you looking for a property for a family, or for a professional commuter? Get some information on that. If you’re looking at flats, be careful because there can be fire safety risks. Does it have a fire safety certificate?

Also, make sure your numbers work as a first time investor. Allow for rental voids because, unfortunately, tenants don’t always pay. Don’t allocate every penny of the rent to cover the mortgage payment. That gives you the opportunity to start building up a slush fund if things go wrong and to cover the inevitable maintenance.

What else do we need to know about getting a Buy to Let mortgage as a CIS subcontractor?

A mortgage broker will guide you through the entire process. We will tell you whether the property you’re looking at stacks up on the figures – because there’s no point offering on something where the rent, your personal income and everything don’t meet the requirements.

A broker would obviously find the right deal for that property and your circumstances. It would take you weeks to speak to all the Buy to Let lenders – a lot of which are only accessible through brokers. A broker can do that in just a couple of hours.

YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

Most buy to let mortgages are not regulated by The Financial Conduct Authority

For specialist tax advice, please refer to an accountant or tax specialist.

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