Guide to protecting your property investment
Historically low variable interest rates have helped thousands of investors, but with rates set to go up, possibly dramatically, the corresponding rise in mortgage repayments could send some landlords into the red. Here are 10 top tips to protect your buy-to-let investment.
- Keep paying your mortgage It may seem like an obvious statement now, but should the worst happen and you lose a tenant, or should your buy-to-let mortgage rate increase to the extent that your monthly repayment exceeds the rent you receive, it can be tempting to simply stop paying. This is never a good idea, as it could ultimately result in you losing the property. It is vital that you speak to your mortgage lender as early as possible, and they will help you arrange a solution. In the meantime, keep making your monthly repayments, even if you have to supplement them with other income or subsidise one property with the rent from another. You will have spent a considerable amount of money setting up your buy-to-let investment. Do not let a short-term setback put that to waste.
- Make overpayments Many mortgage lenders offer flexible buy-to-let mortgages that allow you to make overpayments. If you have any spare cash, it makes sense to use it to pay down your mortgage and potentially save thousands of pounds in future interest. If you are one of many landlords who has seen your monthly mortgage repayment shrink thanks to the large cuts in Bank Base Rate since 2008, maintaining your repayments at 2008’s level would ensure that you overpay automatically. Overpaying your mortgage not only reduces your overall debt, it can also bring down your loan-to-value ratio. This means that you should have a wider range of options, should you want to remortgage. 3)
- Switch to a fixed rate It might seem silly to suggest that you move off a very low standard variable rate and pay more for a fixed rate, but increasing numbers of landlords are doing just that. With Bank Base Rate currently standing at just 0.25%, one thing is certain: rates can only increase. And the general consensus is that when they do, the upswing could be rapid, and people on variable rates will see a significant jump in their monthly mortgage repayments. So it could make sense to lock into a fixed rate deal now, before they too get more expensive. As long as the rent you generate covers 145% of the new monthly repayment, switching to a fix sooner rather than later could be a shrewd move. A fixed rate gives you the security of knowing exactly how much your monthly repayments will be, which facilitates your wider budgeting.
- Use a mortgage broker As a rule you can only access buy-to-let mortgages through a broker. If you were happy with the broker who arranged your existing finance, it is worth consulting them on a regular basis to see what else is out there and what they recommend you do with your mortgage(s). A good broker can be worth their weight in gold. They offer invaluable advice, have access to all of the deals currently on the market, and do the donkey work for you. A broker can help you restructure your financial arrangements, reducing your costs or releasing funds to expand your portfolio. Many of the best funding solutions for landlords are currently from commercial lenders and you really need a specialist to help you navigate this complex lending arena.
- Improve your property Spending precious funds on upgrading your property might not seem the obvious course of action in the current climate. But improving your property can make the difference between getting – or keeping – it let and suffering the dreaded rental voids. You don’t necessarily have to go to the expense of installing a new bathroom or kitchen, but investing a bit of cash in repainting the place, replacing worn carpets and at least making it look as cosmetically attractive as possible can reap rewards. Cleaning the windows and clever use of mirrors can also make a place look bigger and brighter.
- Set up a standing order Have your tenants set up a standing order to pay the rent automatically. If they pay on a month-by-month ad hoc basis, they are more likely to miss or be late with payments if their own finances should be compromised. Most people are aware that their mortgage or rent takes greater priority than other debts, as most people value the roof over their head, but formalising the process of rent payment will give you an added element of security.
- Be approachable It makes sense to do everything in your power to keep your tenant happy, paying the rent on time, and in situ for as long as possible. And this can hinge on the type of relationship you have with them. Always be polite and respectful – think of them as a customer. Inform them in writing 24 hours before you visit the property, which they will hopefully regard as their own home. And indicate that you are there to talk to if they have any problems – including any issues they might have managing their rent.
- Take cover Landlord insurance such as Rental Void Cover and Rental Guarantee Insurance can protect you from the financial disaster wrought by properties lying empty and tenants absconding. And the cost of your premiums is tax-deductible. Many people dislike insurance, but in these uncertain times, with almost half of landlords claiming to have suffered some form of rental arrears during the recession, cover like this could make sense.
- Have an exit strategy in place It is important for you to know what you want from your buy-to-let investment. Do you plan to use your property as part of your pension portfolio? Do you plan to sell up in five years and pay off the mortgage on your home? Or travel the world for a year and use the rental income to support you? Did you get into it hoping to make a quick buck? If you don’t have a game plan for your buy to let investment, it might makes sense to sit down and work one out. If you intend to sell your property do you fully understand your Capital Gains Tax liability? If you don’t intend to sell, and you have an interest-only mortgage like most investors, do you know how you will repay the debt at the end of the mortgage term?
- Sell up if necessary It may feel like admitting defeat, but it is vital that you know the point at which it simply makes sense to sell up. If you are already struggling to meet your monthly mortgage repayments, your situation could simply become untenable when interest rates rise. Selling up could remove the stress and hassle – and even net you some welcome equity to invest or save elsewhere. Portfolio landlords should assess which properties are performing and which are not. Realising some profit by selling up could allow you to expand your portfolio or reduce your debt.