Lucia France: I’m considering investing in a BTL, a buy to let. I’m looking for some advice. I currently am not an owner/occupier due to the fact of house prices being much higher than I could afford on a single person mortgage. I’ve recently inherited some money and I’m looking at a buy to let in an area that I know very well that is much cheaper to buy a property. I could afford a property of 80K by putting down a 20% on a buy to let. My IFA has found me a few lenders who would lend to me on this basis. I’ve worked out a yield of around 10% a year with a rent of 450 to 500 per calendar month. I’ve read that the rules are changing re the amount of income tax that I’d have to pay on the income. I just need to know whether it’s worth it or is there a better way to grow my 20K over the next five or so years? Thanks.
Paul Mahoney: Okay.
Lucia France: That was nice. We don’t often get thanks in here.
Stephen Galpin: [inaudible 00:09:16]
Paul Mahoney: This is something that’s quite common. It’s something that I’ve … well, I didn’t coin, I actually took it from Australia. Rent vesting. People that continue to rent and invest. Especially in London, it’s very, very expensive to buy now. A lot of young professionals who can’t afford to buy where they want to live continue to rent in desirable locations and invest in more affordable areas, where they can still get on the property ladder but at a bit of a more affordable price. For this specific person, 80,000 pound price point, 20% deposit, as a first time buyer they will find that difficult. The average maximum for most lenders is 75% for a buy to let. With some lenders, it’s even lower for first time buyers, especially if you don’t own any residential property.
They’ve said that their broker has found them some options, and they probably have. As to whether that will work will depend on their financial position and the property they’re buying. Although buy to let mortgages are generally a lot more about the property you’re buying, because that’s the serviceability, as a first time buyer there’s a bit more risk in the lender’s mind because it’s only the property that you’re buying that they have as security. You don’t have any other assets they could come after if something went wrong. 80,000 pounds in the UK is definitely the lower end of the market, so I’d be asking where is this property? Does it make sense as a place to invest and does the property stack up? And, they said a 10% yield but 400 pounds rent per month.
Lucia France: Yeah, 450 to 500 pounds.
Paul Mahoney: I think they’ve done their maths a bit wrong there, because that’s a 5% yield. So, that might change their decision to invest. So, assess the area, assess the property. Work out what your mortgage options are. There probably are options that are worth investing in for this person, but seek professional advice and make sure you do it in a way that’s actually going to help you toward your end goals rather than just investing for the sake of it.
Lucia France: I’m not sure whether this is something that you [inaudible 00:11:19] yourself, but where they say they’ve read that the rules are changing regarding the amount of income tax they’d have to pay on income. Is that something to consider?
Paul Mahoney: Section 24, it changes the way that buy to let mortgage interest is able to be tax deductible. Essentially the way that it’s written is quite misleading. It says that by 2021, buy to let mortgage interest will not longer be tax deductible at all. But, you do receive a tax credit at 20%, which also is the basic rate of tax, which effectively means it is still tax deductible at the basic rate of tax. So, this person would only be affected by that if they’re a higher rate tax payer.
Lucia France: From what we’re seeing here, maybe not. Maybe they are. Finally, is there a better way to grow their 20K over the next five years or is this still the best option?
Paul Mahoney: The point I’d make there is buy to let is no longer a do it yourself activity. It used to be. It’s not anymore. There’s a lot more to consider. You do need to be commercially minded and take a business approach to making money through property. The best way to do that if you don’t already have that knowledge is to seek professional specialist advice.
Lucia France: Great stuff.