Thursday, Apr 24, 2008
"The Patchett family have finally given up on buy-to-let"... many more to follow!!
Telegraph: Landlords are feeling the pinch
"The couple rent out four one-bedroom maisonettes in the area. When remortgaging one property at the end of a two-year fixed-rate deal in January, the Patchetts saw the repayments on their £94,150 interest-only loan rise from £384 a month to £459 a month, compared to a monthly rent of £575. Suzanne, 44, a financial controller, said: "If we had stayed with the same lender we would have paid another £2,500 in fees, but mortgage broker L&C found us a 5.85 per cent deal with Bristol & West with no fees. "All four properties are now on five-year fixed rates because of the high bank and building society fees."Since the credit crunch the margins are too tight. It is not viable for us to invest in buy-to-let properties"
Posted by confused76 @ 01:02 PM (1528 views) Add Comment
35 Comments
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1. techieman said...
"Make buy-to-let loans add up
Research the potential rent, as this will limit the amount you can borrow.
Budget for a deposit of 15 to 25 per cent of the property value, plus expenses including stamp duty, legal fees, survey costs, mortgage arrangement fees, tenancy deposit scheme and repairs or redecoration.
Look out for percentage fees, which will be particularly expensive on larger loans.
Consider using a mortgage broker to research deals and costs.
Don’t miss monthly payments, or you will damage your credit record."
OR just dont bother and look for an alternative investment class!
2. maddison said...
Investing in one bed flats is risky. At least with a 2 bed if one person moves out the onus is on the other to find a tenant.
3. bidin'matime said...
maddison said...
"Investing in one bed flats is risky. At least with a 2 bed if one person moves out the onus is on the other to find a tenant."
How can this be?? Mr A moves out so B must find a replacement? What if B goes first - A must find a replacement?? I don't think so. How many leases do you know that are written like that?
4. Chasbmw said...
The telegraph article totally ignores the 'cost' of the money put down as deposit, currently 6% ish
5. confused76 said...
maddison
in what world do you live?
The millstone is on you, the landlord! I am the tenant and do not give two hoods if you can fill / not fill your flats
enjoy a happy, property-free life!
6. jack c said...
I presume maddison meant that if the rent was split equally and one person moves out whoever reamins pays the full rent? thus they have an incentive to find a new flat mate
Happens all the time on Coronation Street
7. i-cld-murder-a-blt said...
The situation is this.
Rent Income 12X£575 = £6900
Less Mort int 12X£459 = (£5508)
Net rental income £1392(for a year)
Lets speculate that this person is a higher rate tax payer so is going to pay tax on this of 40% & NIC of 11% grand total of 100% less 51% = net inflow of cash to landlord of 49%.
Net income £1392 X £49% = £682.08
Divide this by the morgage value 682/94150 X 100 = net return of 7%
That is if there does not need to be any repair work to be done or insurance or professional fees etc etc.
All I can say is I am sure that this aint great when you take into consideration negative HP inflation.
Have fun.
8. C0rnel said...
@ i-cld-murder-a-blt
your calculation is quite right up to the last bit
(682/94150) x 100 == is less than 7%
actually is 0.724 % -- even my current account gives more interest than this property
anyone looking for a nice investment?
the deposit should have been minimum 5% of the property which is around (a bit more than 6k on this case) == interest on this amount of cash will give you nearly half of £682
9. jack c said...
One major point that is seriously overlooked in all of this is the fact that the mortgage is interest only - which means that at the end of the term of the loan, the lender is going to want repayment of £94,150 - so the Patchetts will need to either (a) stump up the cash - they wont be able to re-mortgage forever (b) sell the property - no guarantee they can liquidate and in any event the price may be way down on what they anticipate
10. Timwest100 said...
Surely that is 0.7%. I would be very disoppointed to recieve only £682 a year in a currrent account from a some of £94150
11. maddison said...
All flats I ever rented we jointly signed the tenancy agreement. If one couldnt afford to pay the rent or moved on we advertised for a new flat mate. When I became a landlord I had no voids for 6 years because there was a churn of tenants. Have things changed since... Its probably those amateur BTLers who dont know what they are doing.....
12. confused76 said...
Maddison, "joint rental agreements" are not enforceable in a County court. If one of the tenants walks the only recourse you have is to half of the deposit. You and your BTL colleagues live in a dream world.
Wait for the tide to turn and you will see. Good luck with your ever mounting legal fees!
13. taffee said...
all based on interest only mortgages(when did that become the norm?)...forget maintenance fees and general internal maintenance expected and unexpected
14. taffee said...
oh..and gaps in the rent
15. taffee said...
oh and gaps in the rent
16. jack c said...
@taffee (11) - Interest only is the norm on BTL mortgages - they don't currently stack up on IO but would be even less viable on capital repayment basis.
17. taffee said...
I hear from a friend in a bank that there is a general view that banks will start insisting on repayment mortgages or another savings plan(similar to the old endowment) to run alongside.
What planet are these money lenders on where interest only becomes the norm???????
18. taffee said...
EXACTLY WHAT ROLE DO THE FSA PLAY in banking?
19. cornishman said...
@ i-cld-murder-a-blt said...
sorry to be pedantic:
"Divide this by the morgage value 682/94150 X 100 = net return of 7%"
= 0.7%, not 7%
-even worse
20. jack c said...
taffee said... EXACTLY WHAT ROLE DO THE FSA PLAY in banking? - it overseas wreckless business models safe in the knowledge that the Tax payer acts as a back stop.
21. Axxo said...
Oh and another thing they have missed, if the value of their flat falls 15% ( below the value of their deposit) their mortgage company will ask them to stump up the difference so they don't breach their mortgage offer...
With a prediction of 30% drop, that means they will owe the bank £17,150.. ouch
22. taffee said...
I really feel we are at the beginning of the unravelling of the worst financial scandal in modern history.
vested interest of decision makers,fraud in mortgage applications and packaging,lies and spin in the press..for what?
To create what?
23. This comment has been removed as it was found to be in breach of our Blog Policies.
24. Axxo said...
Taffee:-
To make people rich thats why...
25. uncle tom said...
As a ready reckoner, the sum cost of long term maintenance, short term maintenance, management fees, letting agent fees, voids, insurance, legal costs, bad debt and accountancy will be typically 40% of the headline rent.
So for a £6900 gross rent, the actual amount banked would be £4140, or a loss of £1368.
26. jack c said...
@taffee - have a look at this recent article www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/12/cnmortgage11.xml
A high proportion of residential mortgages are on IO with no repayment vehicle at all - time bomb ticking IMHO
27. This comment has been removed as it was found to be in breach of our Blog Policies.
28. uncle tom said...
inbreda,
I'm not sure of the answer - with regular mortgages, the ending of a fix normally results in the borrower going onto the lender's SVR - all pretty seamless, but costing a lot more per month.
Some of the BTL contracts have some sneaky clauses that allow the lenders to demand a margin call, extra fees etc. - but I've not seen an analysis as to how many BTLers are vulnerable to small print - or whether the lenders are actually exercising the rights they gave themselves.
Whatever happens, I'm fairly confident with my estimate that over the next five years, 75% of BTL mortgaged properties will either revert to normal owner occupation or be owned outright by landlords, and that of those reversions, most will follow the insolvency of the BTLer - around 500,000 repos in all.
29. mark wadsworth said...
Re comment #7.
There's no National Insurance on rental income and you are allowed to knock off a 10% wear and tear allowance from gross rent, so tax due = 40% x ((£6900 x 90%) - £5508) = £281 tax. SO that's the least of their worries.
And to be fair you have to compare that return of £702 before tax with the interest they could earn on their deposit of (say) £10,000, which = 7%, which is all right, but a huge minus once you knock off insurance, repairs, voids, ground rent, capital losses etc etc.
30. jack c said...
inbreda - in the hypothetical example you give, when the 2-year deal comes to an end it will likely revert to standard variable rate. The person with the mortgage basically has 2 choices (a) pay the SVR which is expensive and will likely result in the rent not covering the interest on the loan (b) re-mortgage elsewhere - the problem however is that the max LTV is now 85% and both the valuation and rental assement must stack up - so it might result in the BTLer being forced to sell at which point they find property is an illiquid asset and they are in negative equity if property price has fallen. Time bomb ticking
31. Axxo said...
@ Inbreda:- Most BTL mortgages in the last 2 years have been 85% LTV max anyway, i am not aware of there ever being a 100% BTL mortgage in the last 2 years...
@ Mark Wadworth:- bang on, in fact BTL has been losing money for the last 3 years, LL have just made money form the 10-30% increase in HP...
32. Rimmer said...
All here are forgetting very important points, if each one bedroom place is worth 120K thats 480K on "interest only" mortgages, even if ( and its a huge risky IF )
1/ The rents always cover the mortgages ( See Below )
2/ UK government doesnt have to hike up IRs to support the £ as an emergency measure <<< Not unlikely to be honest.
3/ Immigration rules lead to reduced rental incomes.
4/ UK government taxes second homes ( Just a matter of time ).
Lets say after 20 years the value has doubled ( Dubious ), minus costs, slack periods and CGT i think they will be lucky to see 250K, that may sound a tidy sum but dont forget 250K will be worth approx 1/2 what it is today then, is it really worth it given the risks, if IRs went too and stayed at 8% in all likelyhood this family would be bankrupt.
33. i-cld-murder-a-blt said...
Sorry all, I was a bit of mark with my 7%. was a bit slap dash :-(
But you can see my point the numbers paint a very bad picture! Pete tong all wrong!!
I just wonder what the motivation of these BTL investors is, possible bragging rights about the size of their portfolios?
Cos it aint returns.
P.s thanks for the feedback, just learned a few points on the way :-)
34. who stole my pension? said...
We also have to add in purchase and sale costs. Not sure what this is on a BTL but I bet the EA and tax man still get in on the act. So the meagre gains are even less.
35. Duncan said...
i-cid-murder-a-bit wrote
"I just wonder what the motivation of these BTL investors is, possible bragging rights about the size of their portfolios?"
I saw an article last month in which a couple were subsidising their BTL by £100 a month. When asked why their answer was
"Because it's such a good investment". As long as house prices were rising 10% a year that was probably true. In fact I wonder
how many BTLers actually worried about finding a tennant. Why not just sit on your brand new flat watching it appreciate.
How things change :-)
:- Duncan