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Firstly, the investor will want to find a property that fits their needs. Currently, there is a large market for newly built buy-to-let developments. Many of these offer high yields in top UK cities. As per the end-of-year market update, the UK has seen up to 10.3% growth in property prices between year-end 2021 and 2022. It is then up to the investor to decide what their goals are from the investment, whether than is high yields, large capital growth or both.
Before making an offer on a property the buyer will first want to secure a mortgage in principle. This is an agreement in principle with the bank based on the buyers’ personal circumstances. The agreement will inform the buyer how much they can borrow, which adds legitimacy to any offer made. Once the mortgage in principle is secured, the buyer is ready to make an offer.
When buying a buy-to-let property it is paramount that the investors work within their budget. If repayments are too high, it can cause complications down the line. Complications include, the property being vacant for an extended period, maintenance costs and a change in personal circumstances. This is why investors are keen to secure off-plan properties which are often available below market value but generate high yields and strong capital growth.
Although some investors opt to do their own conveyancing it is recommended that they get a specialist in this area. This is key to keeping the process moving forward smoothly. The conveyancing solicitor will handle all documents, the handling monies and the other parties involved. If a specialist is not used, it can be incredibly costly and even cause the deal to collapse.
Loan to value is the difference between the deposit and the loan when securing a mortgage. A high LTV would be anything from 95-75% whereas a loan to value below 70% would be considered a low LTV mortgage. For example, a first-time buyer may secure a high 95% loan-to-value mortgage as they are unable to save for a deposit, the buyer would then pay interest on the 95% loan.
A cash buyer is someone who has the liquid capital to buy their property outright, without the use of a loan or mortgage. This is often cheaper in the long term as no interest would have to be paid. However, it is much harder to save such a large sum of cash, and this is more often achieved by selling existing assets. Cash buyers can sometimes get a better deal when buying a property as there are fewer complications during the transaction.
Mortgage rates are the amount of interest the buyer pays on their loan. There are a variety of mortgage options available, including:
Fixed-rate mortgages are the most popular mortgage option. This is when the rate is agreed upon with the lender and will be fixed for a set term, which can range from 2 to 5 years. These mortgage options are popular as they allow the homeowner to budget as payments will stay the same for a fixed period of time. Typically, buy-to-let mortgages are on a slightly higher rate than buy-to-live.
Standard variable mortgages are usually the most expensive on the market. The lender can change rates with little to no notice. This is the default mortgage option if a fixed term is not renegotiated. However, the buyer is able to switch to another lender or mortgage scheme with no exit fees.
A discount variable is only available for up to two years; this gives the buyer a -1% discount on their interest rates. If the interest rate is 4% the buyer will pay 3%. Once the discount period ends, the buyer will be switched back to a standard variable rate.
A tracker mortgage usually follows the Bank of England base rate, with an additional 1.5%. Therefore, if the Bank of England base rate is 1% then the buyer will pay 2.5%. This can be cheaper than a fixed rate. However, if Bank of England rates climb to 3.5%, the buyer will pay 5% interest on their mortgage. This makes a tracker mortgage harder to budget for.
Often, a 25% deposit is the minimum requirement when securing a buy-to-let property. However, this may vary on a case-by-case basis, anywhere from 20% to 40%. A 25% deposit represents a 75% loan-to-value, meaning the investor pays interest on the 75% loan. Therefore, investors may look to pay a higher deposit to secure their property with lower interest fees.
Once the deposit is paid, the property is secure and final documents are handed over. If the property is off-plan there may also be a reservation fee. The conveyancing solicitor will handle the exchange of all contracts and see the transaction between both parties through to completion.
Once the deal has reached the point of completion the investor will transfer the final monies. Again, this is usually handled by the conveyancing solicitor and the deal will be completed. Once final monies are paid and the purchase has been completed, the investor will own the property. Now it is time to find tenants and start seeing a return on their investment.
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