With phase two of the Help to Buy scheme recently launched there is some confusion as to what is on offer and who is eligible for what. With this in mind we have come up with a guide so landlords can find out what buyers can get from the scheme and how this may alter the market in the next couple of years.
The second phase of the Help to Buy scheme was launched earlier on in the year, which means that properties worth up to six hundred thousand pounds are now eligible. Furthermore, those who have a deposit as little as 5 per cent now have more mortgage options available to them.
The scheme isn’t just for new build properties either – buyers can purchase a pre-owned property in England, Scotland and Wales regardless if they are first time buyers or current home owners, although the scheme is not available for buy to let investments.
Getting a Mortgage
Whilst the scheme is aimed at getting the housing market moving again, the increase in demand and the lack of supply is pushing house prices up. Although it is now easier to get a mortgage at a cheaper rate there is a high chance that if you only have a small deposit you will also face some harsh affordability criteria. If you have a good credit rating, can prove you can make the repayments and have a 5 per cent deposit you are likely to be accepted for a mortgage, but if you can stretch to a 10 per cent deposit mortgage rates will come down significantly. The bigger the deposit the better mortgage you will receive. Continue reading
The government’s Green Deal scheme, designed to reduce household energy use, is beginning to take shape. From last week, potential Green Deal installers were able to start the process of becoming authorised, ahead of the scheme’s official launch early in 2013. The Green Deal is designed to provide homeowners with finance for energy saving modifications that will help the UK meet its carbon emissions reductions targets, paid back via energy bills. Loans will be available to both landlords and owner-occupiers.
How will it work?
Households can claim loans of up to £6,500 towards improvements on their home for energy-saving modifications such as improved insulation or a more energy-efficient boiler. Loans are linked to the home, not to the owner or tenant. They are paid back via energy bills, so whoever is living in the home (and benefitting from the energy efficiency measures) will pay of the loan. Loans are paid back via energy bills, but the government guarantees that repayments will always be lower than the savings made as a result of the improvements.
In order to get a Green Deal loan, homeowners will need to call in an accredited assessor to look at their home’s energy performance. They will then advise on what energy-saving measures might be useful. It is then up to homeowners to look for Green Deal providers to carry out the work. These are private contractors who have applied to the government to be able to carry out Green Deal work. 22 organisations, including both big-name property companies and SMEs, have signed up to be the scheme’s initial providers. If the scheme is successful, the number of providers is likely to grow.
Will it work?
Opinion among those in the industry is divided. Environmental think-tank E3G has expressed doubt on whether take-up will be high enough to have a significant impact, believing that interest rates for Green Deal loans have been set too high. However, the Green Building Council has backed the proposals, saying that no-one should lose out financially as a result of the scheme. For landlords, carrying out work under the Green Deal may become essential. From 2015, tenants will be able to request improvements, and landlords who fail to carry out improvements may find that it becomes harder to get landlords insurance.
Although the overwhelming body of opinion in the private letting sector suggests the opportunities for those thinking about entering the market have never been better, those who have been persuaded to dangle their feet in the choppy waters of the landlord business would be well advised to think about exactly what they aim to get out of the business before they even arrange business property insurance.
It may seem straightforward at the moment. Young couples looking to buy a home of their own can’t afford a mortgage, homeowners looking to sell their property are having to bring their prices down because of the paucity of prospective buyers out there and tenants looking for a decent place to live are saturating the market. It would seem that all one needs is a hefty deposit, although even that requirement is dropping slightly on buy to let loans, and a clear idea of what you want to achieve.
Rental yield not easy to understand
There are plenty of places where you can get advice and good financial advice is paramount. Any financial advisor will tell a landlord new to the business to work out his rental yield before he buys a property, but that is somewhat easier said than done and is a calculation that is susceptible to dramatic change. It is basically the amount of money you make from your property divided by the cost/value of the property.
It is the value of a property that often makes the rental yield figures susceptible to change. A property bought for £100,000 in today’s stagnant market will probably shift very little over the next 12 months however, in a volatile market the value can change quickly and dramatically. Landlords who bought property at the turn of the century were looking at vastly changed yields when their properties doubled in value by 2007.
Factor in costs
The other side of the equation is easier to understand, easier to manage but absolutely imperative to get right. You must take into account any costs you are likely to incur and offset them against the amount of rent you expect to achieve. Taking costs as a percentage of the rental income you expect to bring in, then first and foremost comes your mortgage and that may well be anything upwards of 70%. No landlord should be without residential property insurance which usually costs around 3% of the rental value. Take out 10% for the upkeep of the flat i.e. replacing damaged fixtures and fittings and factor in 8% for the void periods that no landlord wants but must allow for.
Forewarned is forearmed
Once you start adding these things up it soon becomes apparent the importance of keeping your finger on the pulse of your business and how susceptible it is to fluctuations in the housing market that you have little power over. Starting off with this knowledge though will help any prospective landlord understand the subtleties of the business and not to expect easy pickings without putting in the hard work.
It appears that 2011 may well be the year of the “live-in landlord”. Figures supplied by a leading online letting agent suggest that the current austerity measures and the effect of them on job cuts is leading more and more people to look for a room rather than a house.
2010 a vintage year
Spareroom.co.uk a website designed for those looking for flats or house shares say that 2010 proved to be a bumper year for live-in landlords with over 200,000 putting a room up for rent. They say that advertisements for the letting of rooms went up by 44% on the previous year and the amount of people renting out a room increased by over 150%. They expect this to be surpassed in 2011.
Several factors combining
Not surprisingly perhaps the South East and London saw the biggest growth in people willing to rent out a room. The influx of people looking for cheap accommodation as they start out a career in the Capital, as always, fuelled the lower end of the letting sector and many experts believe the London Olympics in 2012 is already adding to the promised boom of 2011. Of course the present situation with the housing market not moving at all is forcing many to look for cheap renting solutions as they wait for their home to sell.
Look before you leap
A Director at Spareroom.co.uk said that over the last year and half the number of cash strapped homeowners looking for a way to pay their household bills by renting out a room had soared. He went on to say that homeowners thinking of this option should make sure they have completely researched what they are undertaking before they actually take in a lodger.
Informing ones Mortgage Company is absolutely essential, as is getting the correct insurance. A live–in landlord is not looking for a conventional landlord insurance policy, he needs to talk to his property insurance company to ensure he is buying a policy that gives him the cover he requires.
He should also take stock of the practicalities of having a stranger in his own home. Does the home need restructuring to accommodate himself and his lodger, does it comply with the legislation surrounding the taking in of paying guests. Last but certainly not least he must have a legal tenancy agreement drawn up and signed before he undertakes his new role.