Buy-to-let is fast becoming the most popular type of property investment in the United Kingdom. With the high capital growth in the value of residential houses, buy-to-let has become a very profitable long-term investment.
making money in buy-to-let is fairly simple. It is only necessary that revenue from rental and capital growth of the property exceed the cost of the property and mortgage payments. To make the buy-to-let investment worthwhile, the investor/ landlord must have rental income revenue of at least 125% higher than its monthly mortgage payment on the property.
However, one recent trend in the UK is the growing number of 100% buy-to-let mortgages. The lure of this type of investment is that the investor does not need to put down a deposit on the property. Unlike the traditional set-up which required the rent to cover at least 125% of monthly payments, the lower-costing 100% buy-to-let mortgages are attracting a lot of investors.
While the 100% buy-to-let mortgage is an easy investment, novice landlords and first-time investors are advised to avoid it. Property experts believe that only experienced investors are ready to take up this type of investment. Only those landlords with a substantial portfolio should gamble on a piece of property where the rent is just enough to cover the mortgage.
The 100% buy-to-let mortgage deal is being offered by many lenders nowadays. This is because the traditional buy-to-let setup has become increasingly difficult due to rising interest rates and increase in property prices. It is often a struggle to find tenants to rent a highly-priced house or flat, so most landlords are forced to lower their rental prices. Lenders then offer the 100% buy-to-let scheme to those with good credit standing or those with adequate disposable income. However, inexperienced buyers are warned to be cautious.
Since the 100% buy-to-let mortgages do not require the rental incomes to exceed monthly payments, this is potentially a very risky business. With the rental income just enough to cover the monthly mortgage payment, a landlord is forced to hand over 100% of each month’s income to the lender. This puts the landlord in a financial trap if problems of difficult rent collection or expensive major repairs should arise.
Landlords are always advised to make the rental price at least 120% of the mortgage payment. The extra 20% is for a built-in safety margin just in case things go wrong. For the novice landlord or a first time investor, a non-paying tenant could mean a failed buy-to-let deal and thus, repossession of the property. A surplus of repossessed properties could mean serious problems for the property market.
Experts advise that 100% buy-to-let mortgages should only be taken by landlords with the necessary experience, a portfolio of 25-plus properties or worth over ¤5 million. Investors should be capable of subsidizing the mortgage payments from their personal funds if ever rent shortfalls happen. For the few landlords willing to invest in the 100% buy-to-let scheme, they see it as a good property investment, considering the forecasted high capital growth that comes along with the rising prices.
Parmdeep Vadesha is a property investment expert and founder of the largest community of property entrepreneurs on the web who buy below market value properties from distressed homeowners facing repossession, divorce and bankruptcy. He writes a monthly newsletter for over 70,000 property investors worldwide - www.Property-System.com
Please Rate this Article
Click the XML Icon Above to Receive Investing Articles Via RSS!
