What fees and charges do property investors pay for UK properties?
An investment property is a high-value purchase, therefore most property investors buy property with through a buy-to-let mortgage. Using financing to invest in property also means you get to take advantage of the benefits of leveraging in property investment – making money using other people’s money (OPM) as how real estate investment guru - Robert Kiyosaki describes. By investing with a mortgage, you could achieve a higher real yield on your investment money. Below are some costs for investing using a buy-to-let mortgage.
How much can you borrow to invest? Although buy-to-let mortgages work in a similar way to mortgages for investors or home buyers, there are some key differences. In deciding how much the lender will loan to you, the lender will calculate the interest coverage ratio (ICR). They will want to know if your rental income will cover the mortgage interest. Typically, the lender will require an ICR of 125% – for every £100 of monthly mortgage interest payments, they will want you to be receiving £125 in rental income. Some lenders ask for an ICR of 140%.
Some lenders will allow you to include personal income when assessing the affordability of a buy-to-let mortgage. This is essential if you are investing in a property that has a negative cash flow. Don’t be put off by a negative cash flow property – many properties start off this way, and often a property with negative cash flow offers better potential capital gain. A word of warning if you intend to use your personal income as part of the affordability assessment for buy-to-let: doing so may affect your ability to get a mortgage to buy a home, or to remortgage your current home if you need to. Some lenders might assess for buy-to-let costsSome lenders may also want to know that you can afford the costs of running a buy-to-let property. These costs include:
Property management fees
Fees you might be charged on buy-to-let mortgages.
Investors and homebuyers will know that there are fees to pay when you take out a mortgage to buy property. When you invest in property many of these fees are generally similar as they are pretty competitively priced. Below are the charges and fees you may be asked to pay when taking out a buy-to-let mortgage:
· The lender’s arrangement fee: Most buy-to-let mortgages incur a lender’s arrangement fee, which is fixed at a flat rate. Typically, this is around £1,500 while some lenders charge a percentage of the loan amount rather than a flat fee. This can vary from lender to lender but is usually in the range of 0.5% to 2% of the loan.
· Valuation fees: When you invest in a buy-to-let property, the lender will want to know that it is getting value for money. If you default on the loan, the lender may need to repossess and sell the property to recoup what you owe them. To ensure that the property is worth what you say it is, the lender will insist on a valuation. And they’ll make you pay for this, either by charging you directly or via the mortgage broker. Many lenders charge valuation fees according to the value of the property. The valuation fee may also include a charge for administration.
· Administration fees: These are charges that the lender might make for doing all the paperwork associated with the mortgage offer. Sometimes they are included in other charges and fees (such as the valuation fee). The amount of these fees varies between lenders.
· Booking fees: Some lenders charge a booking fee, payable when you are accepted for a buy-to-let mortgage. This secures the funds for you at the interest rate agreed. Such a fee is usually payable separately when you submit your mortgage application and is non-refundable; if you decide not to go ahead, you will forfeit this fee.
· Legal fees: While not directly associated with the mortgage, it is worth mentioning the legal fees that you will need to pay. Your solicitor will do the conveyancing of the property, including local searches and registering with the Land Registry. Often the lender will use the same solicitor.
You will need to pay the legal fees below as they are charged and as required by your solicitor.
· Stamp duty: When you invest in property, you will be required to pay stamp duty and a stamp duty surcharge of 3%. The amount you pay depends upon the value of the property you are buying. As an indication, if you are buying a property valued at £300,000, you will be required to pay a total of £14,000 in stamp duty. This must be paid within 30 days of completion.
· Mortgage broker fees: If you use a mortgage broker to secure a buy-to-let mortgage – and we highly recommend you do – you may have to pay for their services, too. You shouldn’t underestimate the amount of work that a mortgage broker does, and the knowledge and experience they bring to the table. They spend a considerable amount of time finding you the best mortgage, saving you both time, aggravation, and potentially a significant amount of money. They will ensure that your mortgage application progresses smoothly, liaising with you, your solicitor, and the lender. Mortgage brokers may charge you a fee for their services, and they may also be paid commission from the lender.
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How much stamp duty will you need to pay?
The amount of stamp duty you pay depends upon two factors:
The price of the property you are buying
Whether it will be your main residence or an investment property (or second home)
It is charged on a rising scale. Whether you are buying your home or an investment property, if the total price is less than £40,000, there will be no stamp duty to pay. Otherwise, how much you pay is calculated on the price bandings in the table below. In addition to the standard stamp duty, you will also need to pay a stamp duty surcharge of 3%. Your effective stamp duty liability could, therefore, be as high as 15% (on the portion of the property price above £1.5 million). See table below: