How much can I afford?
The burning question most people ask when it comes to buying or investing in property is how much can I borrow, but what you really should be asking is how much can I afford?
The answer to that depends on whether you are buying yourself a home, or a buy-to-let investment. We all need to live somewhere and generally speaking, like for like, it is going to be cheaper to pay a monthly mortgage than monthly rent. The other plus side is that you are hopefully going to make capital gains in the time that you are living there as the value of your property rises over time, although of course you have to be able to afford the deposit first.
With a buy-to-let (BTL) you are not going to be living in the property yourself and it’s an investment so it needs to make you money. It will do this through the rental income and hopefully through capital growth. However things could also go the other way, you might struggle to find a tenant - leaving your property un-let and income-less - or the price of your property might go down.
Buying a home often makes financial sense and if you buy wisely it should hopefully appreciate in value, but a BTL is there to make you money and hedge against inflation. At the time of publishing this article the latest research from think tank, The Centre of Economics and Business Research, predicts average house prices to increase 3.4% in 2016 and 4.4% in 2017, and that growth is not going to be led by London.
So how much can you afford? There are different criteria for home ownership and BTL and each lender and mortgage product will carry its own specific requirements, but here are the things you should be considering:
Your income: Obviously critical for any mortgage. It will be harder if you’re self-employed or retired, but not impossible, so shop around. Proof of income will be needed.
Write out a detailed monthly expenses report; this will be required by the mortgage lender and affordability is critical for you as you don’t want to be over-stretched with a mortgage payment that means you can’t enjoy life. Include the obvious such as utilities, children, food, the costs of getting to work, clothing, any regular outgoings such as gym membership, plus allow a buffer as life will throw surprises that can sometimes be expensive.
Having existing debts will impact on not only affordability but could also prove a problem in achieving a mortgage. If you can, try to clear these first unless it is another mortgage for example and you can show an excellent repayment history which will go in your favour.
Spending: If you are looking at taking on a mortgage and know that you are going to have to cut back as you’re spending money unnecessarily, do it now. Cutting back six months before you apply will go in your favour as it’s likely to be the kind of period a lender will look at when judging your outgoings.
The amount you can borrow
It’s not just a simple case of multiplying your income because how much you will be able to borrow will be based on your income, your outgoings and your age to retirement. Your mortgage provider will also take into account whether you can still afford the payments should interest rates rise.
For a BTL it will be based on the prospective rental income as well as your personal income.
Generally you will get a lower maximum loan to value on a buy-to-let property than you will on a house you intend to live in. There are up to 100% mortgages available for home owners while BTLs tend to maximize around 75% ltv.
However you need to allow some flexibility as obviously interest rates are at an all time low and have only one way to go!
Costs of Buying
There are a fair few one-off costs that you need to factor in and afford:
Mortgage product fee: Most lenders will charge a fee upfront to cover their costs, these vary but typically are around £999.
Mortgage deposit: Dependent on property, mortgage and income.
Legal fees: Essential. Don’t try to cut too many corners as this could cost you dear. Get a quote from three different providers. What level those quotes will be will depend on where you are. It’s advisable not to pay by hour for this service, make sure you get a package fee so that your legal advisor isn’t turning on the clock every time he makes a call or emails, especially if there’s a hold up in the purchase.
Survey fees: You are making a huge purchase, the mortgage lender will get a valuation survey but it makes sense to get a condition survey or homebuyers report on such a large investment. Again, look for several quotes and choose the professional you feel most comfortable with.
Repairs: If the survey uncovers much needed repairs you will need to budget for these – or hopefully get a reduction in the purchase price to cover them.
Removal fees: If you’re moving home you’ll need to get your worldly goods shifted.
Kitting out a BTL: If you want to get the best rent and tenants then your property will need to be nicely decorated and have a decent bathroom and kitchen. You might also want to include some appliances – depending on what you are offering your tenants.
Unfortunately tax is something you have to consider both as one-off purchase cost and also looking ahead. Obviously these will depend on where you are resident and which area you are buying in:
Stamp duty: In Jersey this will depend on whether you are a first time buyer and buying a freehold or share transfer property. Your legal advisor will be able to help you with this. But for a £250,000 property it’s around £3,330 for those who aren’t first time buyers.
In the UK a property worth £60,000 to £250,000 is subject to a stamp duty of 1%, thereafter its 3%.
In Guernsey Document Duty is payable, for eg a £250,000 house it will be £5,000.
You might be liable for income tax on BTL rental income, again dependent on where you are living.
Capital Gains Tax
Dependent on your residential status and where you live, as to whether this is applicable.
There could also be an inheritance tax issue so seek advice on this.
Mortgage Interest Tax Relief
Dependent on where you are resident and where you are buying, seek the latest updates as for eg the UK budget changes in July 2015 saw mortgage tax relief being cut for large BTL landlords. It should have minimal effect for small landlords.
Currently at a record low, they can’t stay that way forever, although the rate rises will have to be steady to protect the economic recovery.
Obviously if you’re buying a home for yourself you should have a good idea of the living expenses, but bear in mind that these might increase if you’ve previously been sharing, or if the property is larger, and you will need buildings insurance.
For BTL the monthly costs will be different:
Letting agent fees: Letting agents can simply find you tenants, or they can offer a full management service. Fees range typically from 10% to 15% of the rent.
Maintenance costs: These are inevitable so allow for a slush fund for these, the good news is they can be off-set against your rental profit.
Annual safety checks: There are certain safety obligations such as ensuring electrical and gas appliances are safe.
Insurance: Landlords insurance to protect the building and any contents and possibly Rent Insurance which is designed to protect you should the rent not be paid by a tenant. Ground rent and service charges may apply.
Purchasing a property, whether it’s a home for your family or an investment, is a major decision. There are no guarantees and it is going to take a large chunk of most peoples’ cash, so you must sit down and work out your finances carefully. Seek advice from an independent financial advisor if necessary and do your homework. Owning a property whether for your main home or BTL can be very profitable but it is a long term investment and make sure you aren’t over-stretching yourself so you can enjoy it.
For information on Skipton International's mortgage products go to www.skiptoninternational.com/mortgages