Whether you’re thinking about climbing onto the housing ladder for the first time, gradually moving up it or buying a property as a buy-to-let investment, it is important to get the right kind of mortgage to suit you and work out the best way to repay it.
CHOOSING A MORTGAGE
There are a variety of mortgages available and the size of the loan, the deposit you’ve saved, your income and other personal circumstances will all play a part in which one you choose.
Two of the most common types of mortgage are:
- Fixed rate – These have a set level of interest for a designated period of time. Many first time buyers prefer this type of mortgage as it helps them to budget more effectively.
- Variable rate – Borrowers who are able to adjust their budgets to cope with changeable payments may decide they would be better off with this type of mortgage, which falls into two main categories: Trackers and Standard Variable Rate (SVR).
Interest rates on tracker mortgages typically move up or down in line with the Bank of England base rate. This benefits the borrower when the rates fall but payments will rise when rates go up.
With SVR mortgages, each lender sets its own rate of interest and these can go or down depending on market forces.
Those looking to use a property as an investment may choose a buy-to-let mortgage. These work like a standard mortgage, but lenders take into account your income, as well as potential rental income, when deciding how much they will lend.
HOW TO REPAY
Once you have decided on the kind of mortgage you want, you need to consider how you will repay it. Two of the main options are repayment or interest only.
If you opt for repayment, it means that over the length of the mortgage you will eventually pay off the full amount borrowed plus interest. Interest only is where you pay off the interest element only as it accrues each month. The payments will be lower, but at the end of the mortgage term you will still owe the amount you originally borrowed, and most lenders will insist you have a strategy in place to pay this off.
BUY-TO-LET
Property can also be a good long term investment. According to Halifax House Price Index, over the past ten years the average house price has risen by 29% and over 20 years by 168%. Growth like this could be one of the reasons why almost a quarter (23%) of doctors surveyed by Wesleyan, say they are investing the majority of their money in bricks and mortar.
Those investors who buy a property to then rent out to tenants traditionally take out buy-to-let mortgages. These are normally interest only and generally the cash from the sale of the property is used to repay part or all of the outstanding amount.
If you have a large lump sum to invest and are considering building up a buy-to-let portfolio, you might want to consider using the cash to put deposits on a number of different properties.
Having more than one property to rent will help minimise your exposure to risk, so if one property is vacant, rent generated from the others may help cover it. As the economy recovers, there could be long-term returns if property values increase.
There are however tax implications for buy-to-let investors. HMRC regards any income that comes from rental properties as investment income, so it can be subject to income tax at 20%, 40% or even 45%. However, landlords are able to deduct costs from the taxable portions of their rental income. These can include the interest of their buyto-let mortgage repayments.
PROTECTION
When you become a home owner, protecting your income becomes essential as you’ll want to ensure you can keep up mortgage repayments if you fall ill or are unable to work for any reason. An income protection plan will pay you a regular tax-free income at, typically, 50% of your pre-incapacity earnings until you are able to return to work. If you have a family you may want to consider taking out a life assurance policy incorporating critical illness cover. These policies will pay out a lump sum if you are diagnosed with a defined medical condition or if you die. This lump sum can be used by you or your dependents to pay off the mortgage.
CONCLUSION
Buying a property, whether it’s to live in or as part of an investment portfolio, can be time consuming and stressful. You might want to take guidance from a financial adviser to ensure you find the right mortgage to suit your needs. Check that your adviser can make a comprehensive analysis of the market and isn’t restricted to a small number of providers.
