Lecture 10: Buy-to-let investments

Question 1

Buy-to-let investors need a buy-to-let mortgage.

Renting out a property is not permitted with a conventional mortgages.

Answer 1

Buy-to-let (BTL) investors need a buy-to-let mortgage.

Renting out a property is not permitted with a conventional mortgages.

Question 2

Buy-to-let mortgages:

• loan amount depends on expected rental incomes, which should be >= 125-150% of monthly interest payments.
• some lenders require borrowers’ annual income > £20K-25K

Answer 2

Buy-to-let mortgages:

• loan amount depends on expected rental incomes, which should be >= 125-150% of monthly interest payments.
• some lenders require borrowers’ annual income > £20K-25K

Question 3

Buy-to-let mortgages:
- interest rates are higher than conventional mortgages
as they’re riskier bec:
> maintenance & upkeep aren’t as good as owner-occupied properties
> investors are more likely to default on the loan as they don’t need to move out of the house
> these are often interest only mortgages, investors don’t acquire larger equity throughout the life of the mortgages.

Answer 3

Buy-to-let mortgages:
- interest rates are higher than conventional mortgages
as they’re riskier bec:
> maintenance & upkeep aren’t as good as owner-occupied properties
> investors are more likely to default on the loan as they don’t need to move out of the house
> these are often interest only mortgages, investors don’t acquire larger equity throughout the life of the mortgages.

Question 4

Buy-to-let mortgages:
> Minimum deposit = 25% of purchase price
> if deposit >= 40% purchase price => lower interest rates
> Arrangement fees (as a % of amount borrowed): higher than conventional mortgages.

Answer 4

Buy-to-let mortgages:
> Minimum deposit = 25% of purchase price
> if deposit >= 40% purchase price => lower interest rates
> Arrangement fees (as a % of amount borrowed): higher than conventional mortgages.

Question 5

Before 2017, landlords could offset BTL mortgage interest payments against their income tax bill (income tax relief)
After April 2020, mortgage tax relief is capped at 20%

Answer 5

Before 2017, landlords could offset BTL mortgage interest payments against their income tax bill (income tax relief)
After April 2020, mortgage tax relief is capped at 20%

Question 6

From 01/04/2016, additional 3% of stamp duty tax needs to be paid on top of regular stamp duty tax rate if the house is an investment property or a 2nd home.

Answer 6

From 01/04/2016, additional 3% of stamp duty tax needs to be paid on top of regular stamp duty tax rate if the house is an investment property or a 2nd home.

Question 7

Disadvantages of BTL:

1. lack of flexibility/ liquidity
2. lack of diversification
3. individual house price fluctuates much more than the indices => riskier
4. high cost of investing
5. high management fees

Answer 7

Disadvantages of BTL:

1. lack of flexibility/ liquidity
2. lack of diversification
3. individual house price fluctuates much more than the indices => riskier
4. high cost of investing
5. high management fees

Question 8

Who are the renters?

• Millennials are called ‘Generation Rent’.
• Those who can’t afford deposit
• Those who want to maintain the flexibility to relocate for employment/ school reasons

Answer 8

Who are the renters?

• Millennials are called ‘Generation Rent’.
• Those who can’t afford deposit
• Those who want to maintain the flexibility to relocate for employment/ school reasons