Despite changes to legislation and regulations bought in to make it harder for people to purchase a buy-to-let (BTL) property, there are still ways to do it and grow a portfolio successfully. But you need to be savvy about how you structure the finance and understand the rental market.
The BTL mortgage market represents 14% of new UK lending. Last year, lenders advanced £14.9 billion for housing purchase and £25.1 billion for remortgaging, while, in the preceding year, they funded £15.6 billion of property purchases and £21.9 billion of refinancing.
Buy to let is a long-term investment rather than a quick way of making money. Whilst house prices continue to appreciate in many areas of the UK, there are places, particularly in London and the South East, where house price growth is slowly curtailing. Gone are the days where you could purchase a property for a rock bottom price, do it up and sell it on for a huge profit.
If you are new to buy-to-let, you must ensure it is the right investment for you. It is a major commitment and could turn out to be more expensive than the expected return, if you are not fully prepared.
The rental return is the key and so you must be aware of the type of yield you will be able to obtain. Unlike house prices, rents continue to rise across the UK and this trend is likely to continue as more people choose to rent rather than buy, and stock levels remain at current levels.
There are multiple ways of affording a buy-to-let property and building a portfolio. Most people use a mortgage, whilst others have cash from a gift or inheritance, other properties or even an art collection they can sell / raise capital against.
Buy-to-let mortgages are used to facilitate the purchase and remortgage of residential property for the purposes of letting to a tenant.
If you are building your portfolio from one or two properties, using existing capital and re-mortgaging may be the right thing for you. By taking advantage of house prices over time, you could release equity by remortgaging a buy-to-let mortgage.
If you have four or more properties with buy-to-let mortgages, it may be worthwhile looking at how to cleverly structure the remortgage of the entire portfolio. An experienced mortgage broker can do this for you. This can release a substantial amount of equity for you to put down on the next properties you buy or to keep back and use on refurbishing / redecorating them.
Whilst lenders have cut back on the range of buy-to-let mortgage products they offer, there are still deals to be found. Again, an experienced mortgage broker with access to the whole mortgage market will be able to help you find the right deal for you.
Selling your properties
Selling your properties can help you to build a portfolio quickly. If you have three properties and no additional funds, selling two of them may put you in a good position to buy more. If you have access to additional finance you might only need to sell one of the properties to build your portfolio.
By selling property you build a bigger deposit pot, enabling you to keep buying and growing your portfolio. You could also look to sell the home that you live in and downsize to a smaller or cheaper property.
Buy to let case study
A couple approached us about what they could do with two unencumbered properties. We listened to the couple’s requirements and took on board their financial situation. We presented them with a few options, one of which was to remortgage the two properties and free £410,000 in capital.
We used the capital along with mortgage finance to purchase five properties for the couple. We were also able to negotiate on price and save the couple an additional £30,000. Each of the properties were let out and are now managed by ourselves. The client make £4,000 per month after all costs and release their dream of retirement.
Upcoming changes in buy-to-let
From 30 September, rules laid out by the Bank of England’s Prudential Regulation Authority mean any landlord who owns four or more mortgaged buy-to-let properties must submit income and mortgage details on all of them every time they refinance one, or purchase a new property.
Mortgages for these types of landlords are already getting more expensive in the lead up to the end of September, and some lenders have cut the range of mortgage products. However, there some lenders who have made very little changes to their product range and don’t intend to change it by much, when the changes come into force. Most these lenders are specialist buy-to-let lenders, who look after portfolio landlords. Lenders such as Shawbrook Bank, Precise Mortgages and Aldermore.
If you are thinking of remortgaging your portfolio or adding to it in 2017, speak to an experienced mortgage broker about your options. You may be pleasantly surprised at what you can do.
Written by Michelle Niziol, CEO of IMS Property Group and Vice President of ARLA Propertymark