Mortgage | Property Investment | Finance Guide

The Bank of England has cut interest rates to 0.5% – a fresh all-time low – and says it will now boost the money supply to help revive the economy.

Interest rates have now been reduced six times since October, and the latest half a percentage point cut from January’s 1% had been expected.

The Bank said it would expand the amount of money in the system by £75bn in an attempt to boost bank lending.

This policy, so far untried in the UK, is called quantitative easing.

Mortgage fraud rose to a 13-year high of £36 million last year, approximately 10 times higher than the recorded £3.7 million in 2007.

According to KPMG’s forensic fraud barometer, more than £1.1 billion worth of cases were heard at UK courts last year recording the second highest level of fraud in the survey’s 21 year history.

However KPMG warned that most fraud committed since the credit crunch has not yet come to court and the trend of increasing mortgage fraud is likely to get worse with the global economic downturn.

The forensic investigation unit of KPMG stated that crime by professional gangs remained at the “extremely high” levels seen in previous years, while fraud by company managers, employees and customers trebled to £300 million last year.

Additionally a fivefold increase in company fraud from £24 million in 2007 to £125 million last year was visible.

For new landlords entering the market, this advice from LONDON’S LETTING AGENT is useful reading.

Stephen Ludlow, Director of ludlowthompson.com, explains: “Virtually overnight people who never anticipated becoming landlords have done so because they are unable to sell their property.

“Unlike buy-to-let investors new landlords may not have had time to research the market beforehand. They may not be clear on how to attract the best tenants or about their legal obligations as landlords.”

What every landlord wants is to let to a ‘quality’ tenant, quickly and for a good rent. This starts with making the right choice of letting agent to maximise your rental return as well as advise and support you. Look for a letting agent agent who can offer you the following -

* Be members of The Association of Residential Letting Agents (demonstrates professional standards). Ideally they may also be members of The National Association of Estate Agents (NAEA) or The Estate Agents Ombudsman Scheme (OEA).

* Operate from high street based shops that are visible and easily accessible to potential tenants.

* Have enough trading history to demonstrate practical experience of lettings e.g. 10 years or more as a letting agent.

* Be experienced enough to advise you on your legal obligations e.g. safety legislation and HMO (houses in multiple occupation).

* Offer effective marketing and website marketing to procure tenants.

* Access to fringe services that landlords require: tenancy deposit scheme, inventory service, rental warranty & legal insurance, emergency repair services.

* Operate recognised training programmes for staff (look for Investors In People accreditation).

* Have a clear complaints procedure.

* Vet tenants using a recognised credit referencing agency such as Equifax.

* Can offer you property management for guidance and support throughout the tenancy. The managing agent will arrange repairs and chase any late rent payments. For 5% of the rental this can make good financial sense when you are too busy to manage the tenancy yourself.

* Have enough local market knowledge to advise you on a rental valuation taking into account any mortgage repayments you may need to consider.

Marketing your property to tenants -
Look for a letting agent who can offer you a wide reach to London tenants via database and search engine marketing.

Beware of low letting agency fees -
There are now many more estate agents moving into lettings agency. Inexperienced letting agents can offer lower fees because they do not have the infrasture of an experienced letting agent. It is a false economy to choose the cheapest letting agent if it cannot adequately credit check the tenant/s or use the correct documentation. Remember that letting agent fees are tax deductible so you should be choosing on best service and ability to maximise the rental achieved with strong marketing.

Proven customer service -
A letting agent who can cater for everyone will attract more tenants to your property. Do they offer online services and support from a lettings property consultant? Can tenants book property viewings online but speak to someone when they need to? Does the letting agent publish customer feedback to prove they can deliver what they promise?

Furnishing -
Don’t over furnish the property as it probably won’t increase the rental achieved. The trend for tenants to rent for longer before buying their own property means that they are now more likely to own at least some of their own furniture. Try to keep the decor neutral and don’t personalise the property with paintings or ornaments as tenants may hide these in cupboards where they are more likely to get broken.

Warranties for appliances -
Put electrical appliances and boilers under extended warranty and choose a letting agent that can offer you access to emergency repair services with approved contractors. This avoids the issue of not being able to get things fixed quickly; often contractors are busy and may not be able to fit you in for a couple of weeks. Items outside of warranty can be pricey to repair. You want to avoid tenants stopping paying the rent because of delayed repairs; under The Landlords & Tenants Act (1985) there are certain areas where tenants may be able to withhold rental payments.

Good information folders -
You should provide details of emergency phone numbers in a tenant’s handbook which could also give details on how to use the household appliances, how the boiler and heating is operated and details regarding the local authority, such as the amount of council tax payable, car parking, and when refuse and recycling is collected.

Landlord obligations -

Record keeping:
You will need to submit a self-assessment tax return to HMRC giving details of your rental income. You can claim for a number of allowable expenses such as accountants and letting agency fees and mortgage interest payments. Seek advice from a letting accountant to ensure you claim all your allowances.

Mortgage & insurance:
If you have a mortgage you need to obtain written permission to let your property from your mortgage provider – failing to inform you lender may put you in breach of your mortgage conditions. If you own a long leasehold you will also need the written consent of your freeholder or their managing agents, who may ask you to write covenants from the head lease into the tenancy agreement

You will also need to tell your buildings and contents insurance provider. Even if you are letting an unfurnished property it is a good idea to take out contents insurance as this will provide you with a level of public liability insurance.

Repayment mortgage is a type of mortgage in which the monthly repayments consist of repaying the capital amount borrowed as well as the accrued interest. In your statement of mortgage which you receive annually indicates the amount borrowed decreases throughout the term.

The main advantage of a repayment mortgage is that at the end of the term, you can be sure that the total amount of the debt has been repaid. Secondly, it also removes the risk of having an investment, the performance of which is dependent on the stock market. Therefore, you are less likely to suffer from negative equity as your mortgage balance will be reducing month on month.

As time moves on, the equity percentage in the property increases. However, in the early years the bulk of the mortgage repayments consist of the interest component, so not much of the capital is actually paid off for some time. Consequently, when you re-mortgage or move home you may find it easier to obtain a mortgage and you may be able to avoid paying a Mortgage Indemnity Guarantee.
There are some disadvantages in repayment mortgage method, ie. you would be unable to benefit from the stock market if it has performed well over the period of the mortgage. Therefore, there is no possibility of being able to pay off your mortgage early with such an investment windfall or receiving an additional lump sum at the end of the repayment period.

If you think of moving house after a few years, then you may have to repay your existing loan and take out a new one, as most of the repayments in the early years consist of interest on the existing balance and not a huge amount of capital will have to be repaid from the original debt.

Many people end up taking out another twenty-five year loan, especially if they are trading up to a higher value property. This will once again put them at the start of the repayment schedule, meaning that the bulk of the repayments are once again being taken up with servicing the interest bill on the mortgage debt.