Mortgages
Buy2LetExpert are not mortgage brokers but have worked with such
professionals for many years from the days long before buy to let
finance was available. Obtaining the correct mortgage is very important.
This is because the potential return to a buy to let investor is both
income (in the form of rent) and capital (in the form of house price
appreciation). However only the rent component pays the mortgage and
bills!
Consequently, an investor in their early years may have much of their
income swallowed up in mortgage payments so their net cash income is low
or even negative! Sure, the asset price may have risen but that is not
cash. It is because the cash component is often so tight that
Buy2LetExpert recommend being extremely careful with mortgages starting
with analysis of different mortgage types summarised as follows:
- Variable Mortgages. Typically the bank or building
society will publish a 'standard variable rate'. This rate would
normally track base rates but may not if the bank is not doing so
well!
- Variable “tracker” Mortgages. Such mortgages vary broadly
with some base indicator. The indicator may be LIBOR, Bank of
England base rates or some other measure. As an example the mortgage
may be priced at x% over bank of England base rates.
- Fixed Rate Mortgages. The mortgage rate (and repayment
schedule) is fixed for a predetermined period (2 to 5 years is
typical). This can be attractive as mortgage repayments remain
exactly the same for the fixed term regardless of what happen to
interest rates and the economy. Fees can be high.
Most mortgages either fall into one of the above three categories or are a
combination of all or some of them. What kind of mortgage is best
depends on individual circumstances. Generally, as described above, cash
flow may be an issue for a new investor. A 50% or more increase in
mortgage repayments may cripple the investor, especially in the early
years where rents remain low. Consequently Buy2Let Expert would seek a 5
year fix. It may well be cheaper to go variable and risk the 50% plus
mortgage repayments but looking at the 5 year fix as an insurance policy
is the way to think. Like all insurance, it is not free, but is there to
protect just in case rates rise alarmingly. Economists, analysts and
others have extremely poor track records in predicting interest rates.
There are simply too many variables and too much uncertainty with all
the variables.
Mortgage selection depends very much on the client. Buy2LetExpert
understands that different buy to let investors may require different
finance solutions. It is important to establish the best kind of
mortgage product for the business before the contacting the mortgage
broker. Some mortgage brokers are incentivised by commission or may not
have the full range of products available to them to sell and this may
cloud the choice of investment. Consequently we suggest to first consult
Buy2LetExpert and then, following this, establish contact with a
competent mortgage broker. There are numerous quality brokers and an
even greater number of poor brokers. Buy2LetExpert have dealt for almost
20 years with two main brokers
www.mothergoosemortgages.co.uk and
mortgagesforbusiness.co.uk who we have always found to be fair and
professional.
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