According to Nationwide Building Society the housing market has started the year on a gloomy note, with house prices falling 0.1% during January. Year on year prices have fallen 1.1% and they do not see any upside in the near future, expecting prices to continue to fall or stagnate. It appears that borrowers are more intent on paying back money than borrowing, with recent figures showing existing borrowers paying back more than was borrowed. This being only the third time this has happened since records began in 1993. In addition, Standard & Poors, the rating agency have predicted a considerable increase in repossessions if the economy slows. It states that almost one in five problem mortgages are severe cases, showing little sign of improvement. They are suggesting repossessions will rise this year as the government spending cuts result in job losses, with mortgage benefits being cut and interest rates rising.
Although the housing market looks bleak at the moment I believe that for some, now could be the time to seriously consider moving into Buy to Let. Of course there are a number of provisos, and the first one to make is to make sure if you are going down this route that a very hard bargain is driven when purchasing. As mentioned earlier, it is possible prices will fall further in the short term so factor this in. Also, as it looks many of us will be working till age seventy, I now feel that taking on a buy to let mortgage at fifty is not too late in your working life.
If we use the example of a fifty year old embarking on this journey, buying a £100,000 house with a £30,000 deposit and borrowing the reminder from Godiva (a buy to let specialist) mortgage payments over 20 years will amount to £424 per month. The rate is a variable rate of 3.99% with a cap on it that stops payments going over £500 per month in the first three years of the mortgage. It is possible that a rent of up to £575 per month could be secured on a three bed property, but it would be prudent to allow 30% of the rent for repairs, void periods and house insurance. So the figure will net out at around £400 per month. The borrower taking out a twenty year mortgage, if they are lucky will have the loan being paid for by the rent. Many of the buy to let lenders allow you to borrow money for up to 35 years and to a maximum age of 75. Therefore there is considerable scope for people of all ages to consider buy to let as part of a pension plan.
In the example I have used above, £30,000 deposit is needed, and even though many people will have this amount of equity in their house, they may not have the cash in the bank. Therefore they would have to raise this on their house. For example, £30,000 at 2.5% over 20 years will add £160 per month to their mortgage payments. Never the less it is a relatively cheap way of, in essence, getting yourself almost the equivalent of a second state pension. This is because once you have paid off the mortgage if £402 per month net rent can be maintained, it will add £4,800 gross per annum to your income which is likely to increase year on year.
There are many pitfalls and considerations with regard to buy to let, so it is essential to take independent mortgage advice if you wish to proceed further.
However, I do feel that the market is likely to change and with long term increased demand for good quality rental properties, and for some buy to let could represent a good on term buying opportunity. If you are looking to purchase a buy to let property, it is worth contacting an Independent Financial Adviser who specialises in mortgages to help you obtain the mortgage that is most suited to your needs. Kieron Bassett Financial Services has two Independent Financial Advisers. Contact us on (01524) 832057 or via e-mail, info@kieronbassett.com.
Kieron Bassett CertPFS
7th February 2011
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