🔍
Buying a Second Property UK (True Costs of a Buy To Let) - YouTube
Channel: Ugo Arinzeh
[0]
How much does it cost to buy a second
home in London? Well by the end of this
[3]
video we're going to find out, so make
sure to stay to the end so you can
[7]
factor the right budget!
[17]
Hi I'm Ugo Arinzeh with Onyx Property
Consultants and Keller Williams I am a
[23]
London-based property agent and I help
my clients find the right property,
[27]
whether they're buying, selling, renting,
or managing here in London. If you're new
[32]
to my channel please make sure to
subscribe because I put out weekly
[35]
videos about the London property market
and everything that's happening in this
[38]
fabulous city. In today's video we're
going to be talking about the costs
[42]
associated with buying a home in London
so make sure to stay to the end because
[47]
I'm going to give you real-world
examples of exactly how much it's going
[51]
to take. So just as a quick overview - the
average home price in London is about
[56]
£470,000
and yields hover around just under 4%
[61]
most investors historically have
been attracted to the London property
[66]
market because prices have gone up so
much over the years and it really is a
[70]
very stable investment especially
relative to other investment
[74]
considerations you might want to make. Now
once you've got a sense of the average
[79]
cost of buying a home in London, the
first question is what kind of budget
[83]
you might have, and whether you're going
to be paying cash or will you need a
[88]
mortgage to help finance that purchase? If you will need a mortgage, generally
[92]
speaking, most lenders will lend from
60-75% percent of the
[96]
purchase price amount or Loan to Value (LTV)
on the mortgage that you'll be able to
[102]
achieve. As a buy-to-let or rental
property you will need a special buy to
[107]
let mortgage and the difference is those
can be offered on an interest-only basis
[112]
and while that might sound good in that
you're only having to pay the interest
[116]
portion it means that over the life of
the loan you haven't paid down the loan
[120]
amount or the original principle amount
at all and you'll have to rely on either
[125]
selling the property or perhaps even
remortgaging to pay off that original
[130]
loan amount. Buy to let mortgages
typically will be at a higher cost than
[134]
your owner occupier mortgages, they might
have additional fees, the loan to values
[139]
might be less, and why is that? Because it
is perceived
[144]
as a greater risk because the bank is
reliant or you are relying on the
[149]
income that will come off of that
property to pay that interest expense. It
[154]
means you might be exposed to void
periods or times when the property's not
[158]
occupied, you're reliant on market
conditions that will dictate the amount
[163]
of rent that you're able to achieve, and
all of those things create more risk for
[168]
the bank and therefore they're going to
have greater restrictions and higher
[172]
costs associated with it most investors
will generally try to get as high a loan to
[177]
value that they can achieve or get from
the bank and that's not a bad idea
[181]
considering that interest rates are
still historically low therefore the
[185]
interest that you're going to be charged
on that is relatively competitive you're
[191]
going to have to actually balance that
against the actual rental income you'll
[195]
be able to achieve because as an
investment property you're going to want
[199]
that rental income to be able to cover
that mortgage as well as any additional
[204]
cost that you're going to have to pay in
owning that property. Next you're going
[209]
to have to consider the actual interest
rate you'll be able to achieve and
[213]
that's generally a function of the loan
amount, your financial situation, the
[218]
rental income you'll be able to achieve,
and obviously where interest rates are
[222]
overall. There are three major types of
interest rates that will be quoted - the
[227]
first is a tracker mortgage that is what
we as Americans might consider a
[232]
variable rate mortgage - it is a
percentage over the Bank of England rate
[238]
and that can change over time, right now
the Bank of England rate is at 0.75%
[244]
and has been there since August
of 2018. So it's been at those low
[250]
rates doesn't really have much more
room to go down. Next is a discounted
[255]
variable rate and that is usually a
discount from the bank's standard rate - so
[260]
say a bank's rate is say at 5%
and the discount is 2% then
[265]
that means the rate you'll be paying is
3%
[268]
now if the bank's rate does change over
time your
[272]
rate will change as well but generally
that discounted variable rate is in
[277]
effect for about two years and then
after that if the bank's rates change
[281]
your loan amount will change as well or
after that it'll kick right into the
[286]
bank's standard rate at the time. Then
there are fixed rates which are set
[291]
fixed for a period of time and that's
generally four to three, five, or ten
[296]
years. For Americans that might be
surprising that you can't get
[299]
thirty-year fixed mortgages which we're
very used to seeing in the States but
[304]
here it's really maybe you can get up to
10 years fixed and then after that your
[310]
rate will convert to the bank's variable
standard rate or if you can look to
[315]
then remortgage the property or
refinance as we say as well. If you're
[320]
able to get an interest-only rate note
that banks might reduce the amount of
[324]
loan to value you could get. So let's say
you were doing a repayment mortgage that
[330]
had an element of repayment to it, if you
chose to only do an interest only some
[335]
banks might only lend up to 60% whereas under repayment you
[340]
might be able to get up to 75% loan to value. So say you had a
[344]
million-pound property you wanted to
purchase and given that rates are
[348]
historically low some of the best
repayment mortgage rates that we're
[352]
seeing is a twenty five year term with a
60% loan to value at
[359]
1.85% fixed for the first
five years and then 4.24%
[364]
which is the bank's standard
variable rate after that it means
[369]
mortgage payments of £2,424 per month
[373]
for the first five years and then
increasing to
[377]
£3,073 a month thereafter but say
you wanted an interest only mortgage
[383]
then in that situation that same bank
might reduce your loan to value down to
[389]
50% so that means instead of
you having to have equity in the 60%
[396]
loan to value situation of £400,000
[400]
if you were doing interest-only you
would now have to have equity of £500,000
[406]
to bring to the
table at the start of the mortgage for
[410]
the purchase but your initial period
payment would only be £504
[415]
per month for the first five
years and then increasing to
[419]
£1,766 per month thereafter in this case
[424]
I would highly recommend that if you are
generating excess cash flow from that
[428]
property you are sure to set that aside
so that you do have enough to start
[434]
repaying that mortgage over time or just
really throwing that money at that
[438]
principle payment which will reduce the
amount you have to pay at the end of the
[442]
term. Given that interest rates are still
historically low you might want to lock
[446]
in for as long as you can the low
interest rates at that fixed rate so
[451]
that when rates start moving up you've
got a longer period of time where you've
[455]
benefited from that lower interest rate
that you were able to lock in today. Make
[460]
sure to discuss your options not just
with your bank but also with a qualified
[465]
mortgage advisor who can look at the
entire market to find where some of the
[470]
best rates exist. You also do need to be
aware that there might be additional
[475]
cost for arranging that financing, some
banks costs may be £1000 for the
[479]
arrangement fee or there might be
additional costs just to set up the
[483]
mortgage and they can range from 0.5% to
1% of the costs associated as
[490]
well as making sure that if there are
arrangement fees you're aware of them
[495]
and then there might be repayment
penalties if you want to pay down that
[499]
mortgage or pay off that mortgage during
that fixed-rate term, so make sure you
[503]
understand all the costs associated and
does that match up with your time rate
[508]
and time horizon to own that property. The next thing you're going to have to
[513]
consider is stamp duty. Stamp duty is a tax on purchase and I've
[517]
mentioned this several times before in
some of my other videos so make sure to
[521]
watch my video on stamp duty to get
clear on all the components that you're
[525]
going to need to know. For purposes of this video
[529]
the key thing to remember here is that
stamp duty for a second purchase will
[535]
incur an additional 3% on top of
whatever rate it qualified for if it was
[541]
an owner-occupied rate, since the
calculation is quite tier based you're
[546]
going to want to use a stamp duty
calculator and I'm going to include one
[549]
in the comments below that you just
click on, put that budget in and get a
[554]
sense of how much stamp duty you might
have to pay, as a quick demonstration
[558]
though let's let's say your budget was a
£1million using that stamp duty
[563]
calculator if it was an owner-occupied
property the stamp duty associated would
[567]
be £43,750 but if it is a second
[573]
property or a buy to let property that
amount jumps to £73,750
[578]
so again
it's a significant cost that you're
[582]
going to want to account for
because you're not going to be able to
[586]
roll that into your mortgage you're
going to have to add that to the equity
[589]
you're going to have to bring to the table
at the time of purchase. So have you been
[594]
considering a buy to let mortgage make
sure to leave me a comment below and let
[597]
me know how the process is going for you. So after you factored the cost of your
[602]
mortgage or interest rate payment as
well as stamp duty the next thing you're
[607]
going to have to factor in are
conveyancing cost. You're going to have
[611]
to hire a solicitor to do the
conveyancing which is all the legal and
[616]
title work associated with making sure
that when that property gets transferred
[620]
to you at Purchase it's clean and in
good hands. Costs associated with conveyancing
[625]
might depend significantly depending on
such variables as even whether you use a
[630]
London-based
solicitor or someone outside of London
[633]
there's some shops that are kind of
conveyancing factories so you definitely
[637]
want to be careful because in the case
of conveyancing you want a solicitor
[642]
that is going to work diligently to push
your deal through in a timely manner.
[647]
One of the things I know as an agent is
that time kills deals so you definitely
[652]
want a solicitor that is moving the
process quickly but generally speaking
[657]
the costs associated with the
conveyancing process might be anywhere
[661]
from about £750 to maybe £2,000/£2,500 depending on the size of
[667]
the property, the purchase and again
being really mindful of the quality of
[671]
the solicitor, the firm that's
representing them, and do they really
[675]
kind of know you personally. So you're
going to want to get perhaps referrals
[679]
on that and if you have any
questions of who you might be working
[682]
with get in touch because we can
definitely give you some perspective.
[686]
Another cost you're going to want to
factor into your budget of owning a
[689]
buy-to-let property is the service
charges or ground rent which are going
[694]
to be indicative if it's a leasehold or
freehold property I've got a separate
[699]
video on leasehold vs. freehold which
explains that whole concept but again
[703]
the service charges and ground rent are
the costs of maintaining that property
[708]
if it's in a property or in a building
with other units you're going to want to
[711]
factor that in because it's
unfortunately not a cost you're going to
[714]
be able to factor or pass on to your
tenants you're going to have to incur that
[719]
directly yourself. Additional costs that
you're going to want to factor in are
[724]
council tax bills but you'll only pay
that during the period of time that the
[729]
building or the flat is vacant it is a
cost that you'll be able to pass on to
[734]
your tenants; in addition there's
building insurance, contents insurance if
[739]
the flat is furnished; furnishings
and other decorative items if you offer
[744]
it as a furnished property; maintenance
and repairs; property management fees
[749]
that you're going to pay to a third
party property manager especially if
[753]
you're overseas; keeping up with notices
and post so again there might be costs
[758]
if you're sending your post and mail to
other places; and when properties are
[762]
unoccupied and they settle, dormancy
issues might arise with pipes, boilers,
[766]
and other maintenance and repair issues,
you're going to want to set aside funds
[771]
to make sure when they do arrive
that you're able to cover them;
[774]
in addition there's annual compliance
issues like gas safety checks; and
[779]
security and oversight especially say if
you own the property in an offshore
[784]
vehicle, there might be costs associated
with maintaining that entity and staying
[789]
compliant for those overseas vehicles.
So in recap in today's video I've given
[795]
you several key components that you're
going to need to factor in when you buy
[798]
a property and then own it over time as
well. Now let's review with an actual
[803]
example on a budget of a million pounds
your stamp duty would be £73,750
[811]
with conveyancing costs estimated at
[813]
the high end of £2,500 with a 60% loan to
[817]
value you'll need to bring £400,000 of equity then for
[821]
ongoing costs first are the finance and
cost at that 60% loan to value
[825]
assuming you go for a five year fixed
rate at say 1.58%
[830]
your repayment monthly mortgage is
estimated initially for those first five
[834]
years at £2,422 per month with a
[839]
£999 mortgage
fee, if you have a service charge as a
[843]
ground rent I've estimated those at
about £400 a month so to
[847]
break-even and cover your mortgage you
would need rent of approximately
[851]
£3,000 per month and we need to
factor in property management fee of
[855]
about 7% which is £210
a month paid to the property manager. As
[860]
a final note ,as an overseas landlord you
are subject to the government's non
[865]
residential landlord scheme
which is a tax asking that you're
[869]
definitely going to want to make sure
you're familiar with and you stay in
[872]
compliance. Make sure to watch my video
on being a non-residential landlord or
[877]
an overseas landlord to get all those
key components that you're going to want
[881]
to make sure you're aware of. So do you
have more questions about a buy-to-let
[884]
investment? Make sure to sign up for my
emails where I can give you great advice
[889]
and perspective and tips on owning a
buy-to-let investment, we also feature
[894]
properties that might be good potential
buy to let investments
[897]
for you. If this video has been helpful,
make sure to LIKE and subscribe, and if
[901]
you have any questions about the buy to let market make sure to leave it in
[905]
the comments below or if you're finding
great deals out there on buy to let
[909]
mortgages make sure to share it with us
as well! Don't forget to watch my other
[913]
videos on the investing in London series
that give you top tips about being an
[918]
overseas investor and actually if
you're domestic as well and own a buy to
[921]
let property or want to build that
portfolio, all the things you're going to
[925]
want to do to make sure that you're
making the smartest investment out there.
[929]
So that's Ugo Arinzeh with Onyx property
Consultants and Keller Williams bye for now!
Most Recent Videos:
You can go back to the homepage right here: Homepage