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Last Updated: Tuesday, 24 August, 2004, 23:01 GMT 00:01 UK
Buy-to-let pitfalls
Money Talk
By Lee Grandin
Landlord Mortgages, managing director

Lee Grandin

Buy-to-let investments have become increasingly popular in recent years, but some observers warn that the market is on the wane. A mortgage expert outlines the possible drawbacks of buy-to-let and gives some handy investment hints.

The past few years have been a golden time for buy-to-let property investors.

It had seemed as if no one could lose as the UK house price boom gathered pace.

No surprise, when you consider the woeful performance of the stock market and the crisis gripping UK pensions.

Money has to go somewhere, why not bricks and mortar offering a potentially tasty combination of capital growth and investment return?

However, five interest rate increases since November mean that the days when you could buy almost any property and turn a profit may be over.

In short, only investors who do extensive research and go through with the deal when the figures stack up will succeed.

New developments can be flooded with buy-to-let investors and when these properties come onto the market at the same time they drive down rental yields

People looking to make a success of buy-to-let will have to be in it for the long term, with rental yield the bottom line and the possibility of capital appreciation an extra something special.

Off-plan woes

In recent times, buying a property off-plan - which means before it is actually built - has been seen as an easy way to get into buy-to-let.

Hassle-free modern properties could be purchased off-plan and by the time they were actually built they would already be showing a healthy paper profit as a result of house price inflation.

But this scenario no longer holds true and buying off-plan can, in some cases, prove a costly error.

For one thing, new developments can be flooded with buy-to-let investors and when these properties come onto the market at the same time, they drive down rental yields.

Many off-plan developers offer special discounts to tempt purchasers.

Don't fall for such developer incentives as some firms inflate the initial price so that they can offer headline grabbing discounts.

Buy-to-let borrowers do have to jump through some extra hoops to satisfy mortgage lenders

Buying off-plan does have its advantages, for example the property will come with a structural guarantee.

But the bottom line has to be does the deal stack up? What is your likely rental income and how much capital are you willing to have tied up in the property?

Mortgage hoops

Popular perception is that buy-to-let mortgages are hugely expensive and very restrictive.

However, the interest rate available on a buy-to-let mortgage is generally not significantly higher than those on standard mortgages.

For example, if a landlord chooses a variable rate mortgage they can expect to get anything from 0.64% to 1.25%, depending on the size of their deposit, above Bank of England base rate.

Landlords also have a choice between interest only and repayment mortgages.

But buy-to-let borrowers do have to jump through some extra hoops to satisfy mortgage lenders.

For starters, buy-to-let mortgage lenders base their decisions on whether or not to approve a loan on the likely rental income from the property and not the applicants' income.

In order to secure finance, rental income needs to be at least 130% of the mortgage repayment and provide an annual yield of more than 8% of the mortgage.

The applicant should also have a minimum 15% deposit and own a main residence.

Lenders will often get twitchy if they are asked for a buy-to-let mortgage on ex-council property, a flat above a shop or in a high-rise block.

Research key

With the housing market showing signs of losing some of its fizz, anyone considering buy-to-let needs to be a savvy operator and do their research.

It is more vital than ever that would-be buy-to-let investors keep tabs on the property locations that they are interested in.

  • Look at local newspapers and community websites, after all a seller is unlikely to mention that they are moving out because of a wave of local burglaries.
  • Don't pay too much attention to promises of high rental yields by letting agents. It is a good idea to contact them first as a potential tenant, to help get to the truth about local market conditions.
  • A little local knowledge can go a long way in buy-to-let investing. The most successful buy-to-let investors purchase property close to where they live.
  • Take the décor into consideration. Poor decoration can take time and money to get right but it can mean that the property can be had at a bargain price.
  • Always get a full survey done of the property, buy-to-let is a huge investment and not to be taken lightly.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.


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