Full Transcript
Dr James:
Hey everyone, welcome back to the Dentsoon Fest podcast, and we’re going to touch upon something today that we haven’t touched upon in quite a while, and that is the M word, mortgages. And I’m joined by my friend MM, as it happens, I’ve just noticed that Matthew Marsh Matthew, how are you today? I’m good.
Mattew:
Thank you, mr Yous, my friend, thank you pardon.
Dr James:
Yeah, I’m good. Thank you yourself. Oh, I’m smashing. Sorry, I just didn’t catch that last bit. I am flipping 10 out of 10. Thank you for asking, matthew. So, matthew, I know that you are someone who’s relatively new to the Dentsoon Fest community, so for those who have yet to meet you, it might be nice for you to do a little bit of an intro, just to set the scene for what we’re about to talk about.
Mattew:
Yeah, no problem, I have been doing 20 years. I left the Royal Navy and I was relatively good with numbers. I fell into banking. From banking led mortgages and I started my own brokerage up in 2005 and rode out through that horrible period in 2008. Luckily, we were a whole market which just meant that we dealt with everything from your day-to-day mortgages, vitalets and everything in between, rather than trying to be specialist in niche. Fortunately, that helped us get through. As things got really tight with mortgages, I then started rolling and working with estate agencies. To bring the full circle that, I decided to open up my own estate agency alongside my brokerage. So I’ve got a good in both mortgages and estate agency. The only reason I got here.
Dr James:
Nice one, my friend. You know what we were chatting to each other just off camera about the acronym ELI5. For those who don’t use Reddit frequently, that acronym stands for explain like I’m five, and that’s going to explain like I am five. People use that to signify a request to really dumb things down whenever it comes to talking about a specific subject. You know what I feel like the title of this podcast should be something along like ELI5 mortgages. Are you with me? Because we want to keep this really, really, really simple. I feel like that’s something that is maybe just not maybe could be a lot clearer is the subject of mortgages, and that’s why I wanted to make this podcast episode, because I know there’s going to be a ton of value locked up in there. So let’s jump straight in. One thing I wanted to ask about mortgages, and this is the age old argument Do I overpay into my mortgage or do I overpay into my investment account whenever I have a little bit of capital tied up? Where do you stand on that one? Matthew, is this being an interesting one? Because I know that you worked in banking and you advise on mortgages.
Mattew:
Yeah. The short answer to that is to if you’re getting a savings rate of, say, 2% and you’re paying an interest rate of 4%, if you’re going to pay for only save, to where would you want to put your money? The only other thing I would add to that is how readily available do you want your money? Because if your money’s in savings, at least you’ve got the option of taking it back. But if you pay it off your mortgage, it’s just paying down alone. At the end of the day. It could be a lot harder to get back out. So the two things you want to ask yourself is how freely available do you want that money to be? If the answer is, I don’t really mind. I’d rather pay off the loan, because higher interest do that. If you think I’ll pay it off mortgage, but I also want it to have the flexibility, then I’d probably stick it in savings so I’ve got more access to it when I need it.
Dr James:
And this is it. And depending on your knowledge or skill or ability or investing, you have to ask yourself can I realistically beat my interest rate every single year and can I do that consistently, which is another thing that plays into it as well. So sometimes what I see is I see people say things like I’m not going to overpay my mortgage, I’m going to invest my money and beat it, but then it never actually quite happens because there’s an active process to taking that money and sticking it in some sort of investment account. So just something to be wary of. We’re all flipping human beings at the end of the day, and sometimes being human gets in the way of these things 100%.
Mattew:
I agree with that. You want to check as well how on your mortgage. Most of them are daily rated interest and all that basically means is the minute you put in some money into your mortgage, the very next day they’ll recalculate the interest based upon that. Now lower balance the amount of interest you’re getting charged on the money you’ve borrowed, or automatically lowers for most mortgages nowadays. You used to get it when mortgages through, the interest rate wasn’t adjusted until either the end of the month or the end of the year sometimes. So just something to watch out for. Most will be daily rated interest, so just automatically recalculates.
Dr James:
just watch it in case it’s longer than that Top stuff and what is the actual process of going about overpaying your mortgage? You get in touch with a lender.
Mattew:
Yeah, typically you can either just contact them and if you’re just doing it as a one-off, just speak to them and say you’d like to make an overpayment of your mortgage. As a guide, most lenders will allow you to overpay your mortgage by at least 10% of the mortgage balance. So, simply put, if there’s 100,000 pound mortgage, they’ll allow you to overpay by 10,000 pounds in that calendar year and they won’t penalize you for doing so, which is a great way to utilize it. But if you do more than that, they might charge you an early repayment charge or like a penalty charge for making that overpayment because outside the traditional terms of that mortgage. So just be mindful when you are speaking to them. It just asks them say, are there going to be any penalties applied to the money I’m about to pay off on this mortgage? Also, they’ll ask you another question. If they don’t ask you the question, you need to decide what you want it to do. You can either get it to reduce the amount of years your mortgage is over. So, for example, if you’ve got a 25-year mortgage and you say I’m overpaying Ten thousand pounds to bring the bus out, notice that your monthly mortgage payments still remain the same. What you’ve done, if you’ve chopped off, how long that is now gonna last because you’ve reduced it overall? If you’d rather not do that and your priority is to lower the monthly payments but keep the term the same, then you’ll need to make sure you let them know that that’s why you’re making the payment. So just be mindful of how you want to do it to lower the monthly payments in the mortgage, or do you want to do it to shorten the term of the mortgage?
Dr James:
That’s interesting that you should say that, because I guess whenever we’re looking at mortgages and which which one to purchase or which one to have the very first thing we look at is the interest rate, but actually there can be a little bit more to it. So you just give us a gleaming example of potentially one of the T’s and C’s that we should maybe watch out for. That we need to be considerate off, as our situation might change and these things might even be predictable in nature. To agree, we might expect a little bit of extra cash and therefore wish to do that. Therefore, take that into consideration, depend on which mortgage we get. Are there any other things like that? And so just to concisely summarise that, instead of just purely looking at the interest rate as the main Determinant of which mortgage we should get, what other things should we be considered about in general?
Mattew:
Yeah, now most lenders will offer you three different types of products. Let’s say, for example, you say quite clearly I want a fixed rate mortgage. For example, the payments are set, so you know exactly what you’re paying. A lender might have three of them, three of them for a five year fixed period. One will be a really low rate, which is the dangle carrot. You think all that’s looks really great. I want to pay that way because that means my monthly payments are really low and then they go. Yeah, but what we’re gonna do is we’re gonna add on this chunky fee for taking this really low rate.
Dr James:
What come on? Yeah, that’s really so.
Mattew:
they say for example, you can have a rate of 4%, which in today’s market is really good. We’re gonna charge you 2000 pounds to do that, they’ll say, but you can add it to the mortgage which they’ll charge interest on, and you go okay, great. So you’re starting off from a 400 and two from a mortgage plus 2000. Or they’ll say option number two Is will offer you a mortgage at, say, 4.25%, so the rates higher, but we’re gonna charge you a moderate fee, say 999 pounds and anything, okay. Well, there’s the balance, the rates gone up, but the feeder child is gone down. Or they’ll say but off you this rate and it’s four and a half percent, but there’s no fee. Okay. And then you’ll be thinking to yourself well, I only wanted to pay X amount per month. So that’s when you have to weigh up what the main driver is for you. So sometimes you might want lowest rate because your primary driver is I just want the lowest monthly payments. I’m aware I have to pay a fee for it, but I just want the lowest monthly payments. If your primary driver is, you want the best overall deal. I, based upon the rate that I’m being charged and the fees that come with this mortgage, and then it’s working out in the balance of that. Now, that can vary, so, for example, if you have a mortgage of 100,000 pounds and your rate is 4%, or you have a mortgage of 500,000 pounds and you use those same rates and same fees, then it might work out. For the small mortgage. Adding the fee Is not so advantageous. If you’re taking a big mortgage, then the fee becomes less relevant and therefore that deal might be the better overall deal. So it’s those things to watch out for. So, yeah, be mindful of the just picking the lowest rate, because there could be a bunch of fees are tied into that.
Dr James:
Got you and that’s interesting and I was just trying to do the math in my head there. So basically, it’s a situation by situation assessment and it’s about crunching the numbers effectively on that one by the signs of it. Yeah, cool. Anything else you should watch out for, aside from the interest rate, there’s bound to be loads.
Mattew:
Yeah, there’s. There are other things as well, such as just touching more on the fees is a lot of lenders will offer things like free valuations, cashbacks, free legal work, those kind of things which sound great. They’re all incentives and they they’re like wow, well, we can go with this and that’s not a bad thing. If you’re looking at investing in a property, for example, you might think, well, I want to do this and I don’t want to outlay any money, so I don’t want to pay anything to get this property value, because if there’s a load of problems, I don’t want to waste my cash buying to check that out. So let the lender take the risk, but they’ll. They’re going to make their money somehow, because these banks know how to make money. So what they’ll do is they’ll adjust their rates, they’ll adjust their fees to make sure that, one way or another, they’ve costed it out and they’ve worked out how they make their money at the end. Most lenders nowadays will offer you a standard mortgage valuation and, without getting drawn into the world of different valuations, you can have out there to make it more complex and mortgage valuation only going out to check the property is worth what they say it’s worth and there are no clear and obvious signs of Damage or that is habitable. It’s only really in the lender’s interest for a standard valuation. If you want to get something more in depth, I you buy something to invest in. Think, if you did this bit, like being a tire kicker a car if you go to get a standard valuation, you might go there. Go, I am sorry. I know enough about cars. That looks fine and if you think about it, you’re about to spend 250,000 on a house. All you do is sold a scene. Look at it, you go, that’s right, here’s 250,000 pounds. It’s a big investment to not even turn the taps on, check the electrics, check the gas pressures, check all of these things. So I would normally suggest you want to get a bit more of a survey done and just being drawn in or sucked into. I get a free valuation out of this, so that’s a big one. We can talk a lot more about that one, but I’ll move on. And also turnaround times is a massive one. Okay so if you’re picking the lowest. So what another thing that lenders will do is they will pick and choose their moments, dip their toe in and out the water. So, for example, let’s say Barclays a month ago were all over the place like offering the best rates, the best terms. They get overloaded with a load of business because they’ve been offering the most attractive products. They struggle with the capacity, their turnaround times get drawn out and then when you’re trying to get the mortgage, which really slowed it up, what they’re doing at the same time is they end up pricing themselves out so they’re no longer competitive. And then somebody like Halley facts or Santander will come in with a better rates in terms because they deliberately now increase their products to be less attractive so they can get on top of their case. What does that mean for you and me? Well, we were thinking when we applied that this would be a simple process that try to get my this house or this investment board. So it works me on a timescale point of view that this should all be nice and simple. But now, all of a sudden, it’s taking me a lot longer because the lenders overloaded, or the rubber capacity or and it’s now putting a jeopardy this house that I want to buy, because the turnaround times or the extra criteria of the lenders now making it harder to get through. So be mindful of the turnaround times of the lender.
Dr James:
Wow, thank you so much. And you know what? I bet we could probably make a whole podcast about those things in themselves, right. Yeah, absolutely yeah. I sense there was more to it. I sense there was more to it, but that’s good. Here’s the thing. We can make a whole podcast about that and maybe we will do someday. But even just those top three, those valuable little gems, right, they will be hugely useful. So thank you for that. Yeah, no problems.
Mattew:
Definitely could have waffled off a lot more about those things.
Dr James:
It’s cool, I can feel the energy and I like it. I think that’s awesome Because what that means is it’s engaging to listen to. Let’s move on for the time being and, like I said, perhaps we could do a whole podcast on that in itself someday. Things to watch out for, things to be conscious off when taking out a mortgage Residential mortgages there are obviously certain criteria through which each property and each candidate is passed through. How can we make that work for us, or how can we make ourselves as appealing as possible as people who wish to take out mortgages to these lenders?
Mattew:
Okay now there are basically three principles in which all lenders lend their money. Everything’s about risk as far as their concerns. Now, one thing to remember is the bank doesn’t know you from anybody. They’re a complete stranger. And if you were to ask a complete stranger, I want to borrow £500,000,. They’re going to look at you a bit funny and wonder what’s in it for them. Are you a safe bet? So they base it on three basic areas of criteria. One is the security. That is, what are you buying? Is it worth what you say it’s worth? They’re not just going to take your word that I’m buying this house of £500,000, therefore that’s what it’s worth. That’s why they get a valuation on it, to make sure it’s worth what you’re buying for and that it’s not a wigwam that you could pick up and take away. It’s actually bricks and mortar or something to that description that they can stick their money on. So if you don’t pay, they have the opportunity. The whole point of the mortgage is there’s an asset there that, if you’re unable to pay, as a last resort they’ll look to force a sale so they can get their money back. That’s the whole point of checking the security. So within that becomes your deposit. So if you’re buying a £500,000 house, what they’re thinking is the reason why they want to deposit is they want to see that you’re a little bit invested in it too and you’re not solely reliant on the bank. Why is that important? Well, if you went to your friend and you went to buy something and they said I really, really want this and I’ve only got a five and can you give me the other 95 quids, your friend’s going to look at you a bit funny and wonder why and you really want it the way that they got it? Because house prices can fluctuate and because they don’t know the kind of person you are. If you bought this house of £500,000 and the house prices drop and then all of a sudden, because that you lose your job or whatever else, or you’ve turned the house into a trash house, it’s no longer worth the £500,000. So the lender goes right because you haven’t been able to pay the mortgage. We need to take it back to possession. But it’s now only worth £475,000. But the mortgage on it’s 480 already, plus their legal costs, plus what they got to sell it for. So it proves that it’s a high risk to the lender when you’re only putting in a small deposit. So therefore, the bigger the deposit which normally goes up in 5%, survived, then 10% and 15%, so on and so forth. The bigger the deposit you can put down, the easier the risk is to the lender. Therefore, the cheaper the rates and terms. You can get in the bed of the terms and the criteria is a little bit more flexible. Every time you can creep up because you pose less of a risk. So that’s a security. Second area is the affordability when you afford it. So the aid-old argument well, I can afford this much rent. I could afford that mortgage Again if you were to pay rent every single month. There’s no assets. The asset doesn’t belong to you. The asset belongs to someone else. That’s why it’s easy to do that. But when you’re buying something, there’s the investment element in that property. It’s going to be yours. So they need to know you can afford it. And they’re not just going to check your bank statements as much as we want them to say that that’s blue. They’re going to want to check pay snips, they’re going to want to check tax returns. They’re going to want to double check that you can afford. It’s probably one of the biggest areas they’re going to want to check, and it’s just especially prudent for self-employed people as well, which again we could do a whole. Nother one about that, but it’s about a lot of people will make sure that their accounts are smart, so they only have to declare the minimum, so they pay the minimum amount of tax. However, when it comes to borrowing the length just like if you’re paid, whether tax gets sorted out straight away from you, you don’t really think about it if you’re an employee. When you’re self-employed also, you try to keep those figures as low as possible. But if a bank’s looking at somebody’s pay snip and that’s their annual salary, that’s why they look at you when you’re self-employed and based upon your tax return or your tax calculation, and they want to see how much you’ve declared for that last year. And the reason why when you’re self-employed they want to look at a minimum of a year ideally two years worth of accounts is there’s inherently more risk in being self-employed than there is when you’re employed. It doesn’t mean if you were employed you couldn’t lose your job tomorrow, but it’s far less risky. So they just want to prove one you can afford it. They’re going to check not just to your income, but they’re also going to check what your outgoings are. So if you’ve got, you could be on £50,000 a year. You could have a car on finance, a personal loan, three credit cards and two kids, or you could be, and the affordability would be better for somebody who was on £30,000 a year with no debts and no kids, because what they’re doing is they’re balancing out yep, you might have 50,000,. We also need to strip out all of your regular commitments, because you’ve got to find somewhere that you’re gonna afford that mortgage with all of these other out goings to go to go with it, whereas you might be earning less and be able to borrow more. So we need to factor that in. Some lenders will use, as a rule of thumb, around four and a half to five times your income. But please, please, please, don’t solely rely on that simple algorithm, because most lenders nowadays are heavily affordability based and they will check your affordability and a lot of the time they’ll use ONS the Office of National Statistics statistics data to verify your income. So even if you’re only paying 200 pounds on your food shop and the Office of National Statistics says that it’s 350 pounds, that’s what they’ll use, because it’ll always on the side of caution. So you might think I can afford this, but that’s how the banks are assessing your affordability. The third one is the are you credit worthy? Okay, so what they’re doing is, by doing a credit check on you, they wanna make sure. What are you like as a payer? Do you manage your affairs right? So what’s being reported when you’re paying your loans, your credit cards, your car finers, even things nowadays like your utility bills, your mobile phone contract? Are you on the voters role, which is a big one that boosts your score To the reason why that’s important? Because it showed you’re stable. And then you’re in one point. I think you wanna vote or not, it’s up to you, but it shows that you’re registered and you’re there. So if you ask yourself a question, if your friend said to you they wanted to borrow money but you knew the record of them paying back their bits and bobs was very patchy, you’d be reluctant to lend them. Likewise, it’s true for the banks. That’s why they use the credit report, because they wanna check what your history’s been like, why you were a good payer of these debts. Now, the downside is, if you are the kind of person that never borrows money, you don’t have any kind of history whatsoever, then your credit score can be low and it’s very simply because you’re an unknown quantity. They have no idea how good or bad you are at paying back borrowings or your utilities or things like that. And if that was the case and you wanted to try and establish at least a base level credit profile, you don’t need to go out and borrow money or get credit cards or anything else like that. Normally you can just double check that your utility bills, like your gas or your electrics, are being recorded or your mobile phone contract is being recorded on your credit profile. Not have too many searches done, because sometimes, even though you might be shopping around for the best deal, if they’re all doing searches on you, if I’m your friend and I don’t know anybody else and I think we’ve asked Philip James, timmy, tasha then I’m gonna be thinking you must be really eager for this money and worry about what a risk you are. So you’ve got to be really careful that you’re not asking all in sundry. They’re all doing searches on you because as far as another lender’s concerned, I think in what you’re asking all these other people, I hear that desperate. So there’s little things like that that you need to make sure that manages your credit risk. So, in summary, it’s the security, the affordability and the credit risk, and you’ve got to hit all three. The bigger the deposit, the other two become a little bit more flexible, but you’ve always got to score on all three. There’s no point saying I wanna buy this house to live in. I’ve got 400,000 pounds as a deposit by this million pound house but I can’t prove my income. That’s not good enough. They still well. There’s still a second of doubt about more good you want. We still need to know you can pay it, don’t matter how big your deposit is. So just mind those things in place.
Dr James:
One, two, three, boom, boom, boom. I love that there was so much detail in there. You know what? Something just came into my head as you were talking and I wonder does this affect your credit score? Oftentimes, dentists, when they get to the end of the tax year we’re self-employed right Now. Sometimes, when you’re self-employed, you find yourself chasing your tail a little bit when it comes to tax, cause you have an idea of how much you’re supposed to have, but we’re not accountant, so we don’t ultimately know. So we can find, particularly if our accountant doesn’t get back to us for ages. We can find, or or to give the accountant some credit if we don’t contact them for ages. Okay, we get in touch with them at the end of January, like everybody flipping does, right, and then we find that we’re basically a little short for HMRC. Then you know, obviously there’s the option of spreading out the repayments with a little bit of interest. Yeah, yeah, does that affect your credit score?
Mattew:
It depends if it’s been recorded. Normally, if it’s not being done by a credit, if you’re just paying HMRC, hmrc don’t normally record their payment profiles on your credit report, but they will record it if you default against that agreement. What I mean by that is so normally if you’ve missed the payment on like a credit card or a loan or anything for that matter normally if it’s within 30 days or within that calendar month, they’ll normally just it won’t even show on your credit report. But if you miss it by more than a month, they’ll mark it as a one or two if it’s two months, and so on and so forth. But if you get to a point where and a default is very simply that I made an agreement to pay you X amount of money and that was the agreement that we set up for you to give me the credit facility to do this. But now I can’t afford to do that or I haven’t kept my end up on that, I have defaulted against that original agreement. And that’s what can happen with a default. That shows that you made an agreement with a lender and now you can no longer manage that, which then affects your credit support. That can then evolve into a county court judgment where what that means is the lender’s decided yes, we still want our money back, but rather than us just chasing you to the month for the money, we’ve now applied to the court to get a court order for you to pay that money back. And that’s a county court judgment and those things aren’t great for you. So it starts off with a mispayment, then it’s a default, then it’s a CCJ and then bigger and beyond that would be things like an IVA or bankruptcy, which obviously we always want to avoid where we can, but in certain circumstances and I hope it’s for nobody that’s watching this now sometimes it can be the only option and I do understand that we’re not all in that lucky position and life does happen. But make sure that before you do anything like that, because they all make it sound so easy, we can make the debts this much each month, but you can absolutely wreck your credit profile if you do these things.
Dr James:
Yeah, totally, I’m totally sympathetic to anyone in that position. Regarding the tax thing, I was curious because I know that sometimes some dentists do take HMRC up in that option, and I was curious because I’ve had a few people come to me and say we believe this is meant that it’s affected our credit rating. So it was interesting to flesh that out Full of flipping gems really good stuff. Can we take that exact same question that we just asked regarding criteria for residential properties and how to make them work for us? Can we now take that and apply it to buy to let’s? Because, oh my God, dentists love their buy to let’s? Let me tell you. So this stuff will be super valuable.
Mattew:
Okay, yes, absolutely so. It’s tested in a slightly different way Most lenders. So if you wanted to spread the whole market, we’ll just want you to be able to show you that you’re earning 25,000 pounds a year minimum, irrespective of you’re taking out a 500,000 pound mortgage or a 50,000 pound mortgage on a buy to let, because largely they’ll class as self-financing, ie the rent you’re gonna be getting in for that property will cover the mortgage. So they’re really only interested in well, what rent is it gonna get in? Now, this is the affordability section of what we were just talking about a minute ago. So, instead of assessing your income and those kind of things, because they’re not really interested in how much money you’re making I’ll come to that a little bit more on that in just a second but they’re more interested in does the rent cover the mortgage? And they will get a value as part of the security side of things to make sure, one, it’s worth what you’re paying for or it, and two, what’s the open market rental on that? Okay, now, value is very audit driven people, shall we say. They probably wear gray and EQ cover sandwiches, but they no offense to any valueers listening? hopefully no, but they’ll always err on the side of caution because what they’re doing is they’re giving an assessment based on that which they are accountable for. So if they turned around and said willy-nilly that it was worth this much and then the mortgage company wanted to take it into possession and they said, well, hang on, it’s never worth knowing near what you said it was worth, obviously they’ll allow for fluctuations in the market from when it was, but or this isn’t a suitable security. You told us it was. They’re liable for that. So they’re always gonna err on the side of caution. Typically they’ll base the value and the rental income based upon what’s happening in and around the market. So they’ll look for comparable properties. So if it’s a three bedroom semi in that area, they’ll go well. Generally, three bedroom semis in this area we’ve done our research let out for 1,200, 1,500 pounds a month and they’ll get three comparables and they’ll go right yep, so based upon that comparable evidence that this is what this property should achieve, and they’ll give a report saying house is worth X, amount the rent is getting is worth Y. From that they’ll apply that to the affordability and go right, what kind of rent are you getting on this place. And then there’s another stress test, which I’ll come to at the end, but they’ll then stress test that to make sure that this is more than okay to fit, taking into account that they will also allow a percentage to allow for if the property’s empty. If the property needs a repair, I that boiler on that property goes, or it needs some general repairs, or you’re paying a letting agent management fees, they allow a portion of that. So it won’t be just a simple case of well, the mortgage is 1,000 pounds a month, my rent is 1,000 pounds a month, so that should be okay, it’ll normally be. Well, the mortgage is this much a month and therefore I need to make sure the rent is a lot higher, to make sure it’s gonna cover all the potential pitfalls that it could do. So you always wanna make sure that the rent is going to be more than sufficient to cover the mortgage payments, and that’s normally more than enough for the lender Without going too much into it. There are options where they will do things called top slicing. All that means is the rent’s not matching or the mortgage payments that are needed. So we will allow you to use your income to top slice or cover off the difference. Okay, let’s move this. It’ll do that, but there are mortgage providers that will do that. So if you think the property’s really, really good because sometimes it’s not all about the rent that you’re getting for the property, sometimes it’s about but if I can pick this property up now worth 100,000, I know it’s an up and coming area I’m doing it for the longer term growth of the asset and therefore I think that the property will be worth 200,000 within I don’t know, five years because of the development in the area. So you’re buying it for the longer term investment, not necessarily the rental each month. So that would be handy in that scenario. The typically on this, going back to security, you will need to put down a 25% deposit of whatever property you’re buying, so the deposit’s much larger. On a residential mortgage you can get away with a five 10% deposit, no troubles With a buy to let. It has to be a 25% deposit on that property. Now there are one or two providers that will let you put down a smaller deposit, but you will pay for it. The rates will be higher. The criteria is harder, so you need to double check that, but it’s at least a 25% deposit typically for most buy to let mortgages. Okay, so security still makes the same things as residential, but your deposits 25%, and then that feeds into the affordability. Does the rent cover off the mortgage payments and allow a portion for missing rental payments or where it’s empty or repairs? And then the credit criteria is pretty similar. They want to check that you’re a safe bet. Now the key difference as well is the regulation between the two. This won’t mean a lot to everybody else, but to us, as advised, as it does. With mortgages on residential houses, their class is regulated under the Financial Conduct Authority, and with Bytelect, typically they’re not regulated. That doesn’t mean that they’re unsafe. It just means that because their class is an investment rather than the main property you live in, the rules under the FCA change slightly. Now we just need to know that. Here’s the quirk If you or any member of your family at any point ever lived in that property, it class as regulated, which can change the lenders that you can approach for that, and that’s at any point. So you’re going to live in a house, moved out, rented it for 10 years, but they’ll now class even though you’ve never lived in it and you go to remortgage it or do something with it later on down the line, and they’ll still chast it as a regulated mortgage. So just be mindful of that. You do need to let your broker or lender know if you’ve ever lived in it, because it will make a difference to the providers you can approach.
Dr James:
Does that ever work in your favor if we take that and flip it on its head Because you could live there for a month, call it, you know whatever. How do you get a mortgage on it right and then rent it out right and then do something along those lines? Obviously, everything’s strictly above board. You know what we’re about to talk about. But what I’m asking is is there ever a situation where that can work in our favor? Because to me it’s. There might be.
Mattew:
Yeah, absolutely. So you can have more than one residential property, first and foremost, so you are allowed to have that, it has to be plausible. So, for example, if you had a residential property in where I am from, in Portsmouth, and I was doing a lot of work in London rather than paying lots of money to Airbnb and stuff like that, so if I’m going to buy myself a little bolt hole in London, I can work from there and come back, or I’m buying a house for my mum or something like that, then I can have more than one residential mortgage. But in this scenario where I’m thinking to myself right, well, I’m going to buy this house, I’m going to live in it, do it up, sell it on or let it out, depending on what I’ve done with it, and you can absolutely do that under a residential mortgage. Yes, you can. All that you’re obligated to do is, at the point in which you vacate the property, to let it out, you need to let the lender know that you wish, or what they call a consent to let Can I please let this property out? And typically they’ll say, yeah, not a problem at all. They might apply a small charge to the mortgage or the rate that you’re paying because it’s now affected that, and normally what they’ll do is they’ll be a rolling six month thing that the old staff have to go back and say, yes, we’re going to consent to you letting us out for six months and then you just have to apply every six months. As long as they know the security’s safe, they’re fine. And then when you get to a point for example, let’s say you did a two year fixed mortgage they’ll just say, right now it’s a buy to let. You now need to switch this mortgage to a buy to let mortgage because you can’t keep the residential mortgage elements you had on it, because we know it’s being let out. That short answer is you could buy it as a residential as long as you’re physically moving into that property, doing it up and then switching it out. You would need to double check, make sure you let your lender or advisor know that’s what you’re doing, because the best thing to do in that scenario then is to try and make sure there is a mortgage that doesn’t have any tie ins, because you might move into it, get a great deal on your mortgage. Try picking mortgage without any ties or those early repayment charges we spoke about earlier. That way you can then flip it without having to pay penalties for the lender for leaving that mortgage early.
Dr James:
Very cool, thank you for that There’ll be a lot of people out there who have buy to let, or you think in a buy to get and buy to let. But given that interest rates are what they are, then what that means is they’re not nearly as profitable as what they once were, at least for the time being, compared to low interest rates. There is, certainly there must be, means that we can undertake in order to make those more profitable from the mortgage side versus the actual rental side.
Mattew:
Yeah, yeah, absolutely. So. One of the things we want to check whenever you’re buying these things is making sure that the rent is more than sufficient as we mentioned on the affordability a moment ago, to make sure that the amount of rent you’re getting is going to more than cover what you need. So how to work out the basic stress test? To bear with me on this, this is quite straightforward, but it involves a few little numbers. So there’s a few little things to write down. The first of all, you want to take let’s pick the example of numbers, nice and easy a hundred thousand pound property. You want to buy a hundred thousand pound property. Okay, so you take your hundred thousand. You know it needs a 25% deposit. So that means you’ve got a mortgage of 75,000. So the mortgage 75,000, we’re going to divide that by 12, 12 months in a year. Okay, divided by 12, break down the monthly, that will give me a figure of 6,250. Okay, by then, the stress rate that the lender charges is not the rate you’re paying. Sometimes it is, but normally it’s the rate at which the lender thinks. Well, if everything goes haywire, like it has done, and the rates go up, we need to still make sure this fits. Now, that can vary wildly lender to lender. Okay, so free, but the average at the moment is around 6.5%. You might only be paying 4.5%, but the rate that the lender is stressing this mortgage at is 6.5%. Okay, so that’s 6,250 we spoke about. We times that by 6.5%, that will give me 406.25 P. That’s okay so far. Okay, so that 406.25, that’s the interest at where stressing this borrowing of 75,000 Dom, if you are a basic rate taxpayer, not in a higher tax bracket, they will then multiply that by 125%. Okay, and the reason why they multiply that by 125% is because 100% is to cover the mortgage at the stress rate and the extra 25% is, as we mentioned before, to cover if there’s repairs that need to be done to the property, if you’re paying a letting agent, if you’ve got a period where the property is empty and not getting rent. So that’s why there’s that 25% that they’re applying to that.
Dr James:
So just that was to be clear. Multiplied by 1.25, right to get 125%. And we’re just to spell that out. Yeah, absolutely.
Mattew:
So that would mean for a mortgage of 75,000 pounds, the rent for that property would need to be 508 pounds per month. Okay, because then that meets the stress rate at the 1.25 that we spoke about, and that’s as easy as it is. If you are a higher rate taxpayer, then they’ll add another 20% or another 0.2%. So if they were stressing that, then it would be at that stress rate that we talked about and then they would multiply that by 145% or 1.45. So that would mean the rent on that as a higher rate taxpayer would be 590 pounds a month. You’d need in rent Very quickly. How you beat that if you’re a higher rate taxpayer and we will do a whole different podcast on this, if you want to is we could look at doing it as a limited company by to that. Yes, yes, yes, yes. Which is a whole different, which will keep that much easier, but that’s a whole different podcast. But it just helps you understand how the lender is going to assess you and when you’re looking at it, you will think to yourself how much deposit do I need to put in? Is 25% going to be enough? Because the lender might only say well, based upon the rent that’s coming in, we can only lend you this because that’s where the stress rate gets. So that’s really important. Otherwise, because a common myth that we come across quite a lot is well, I know that the mortgage more than covers the rent, but that’s based upon the rate that they’re paying on the stress rate and they also haven’t applied 1.25 or 1.45. So you need to be really, really mindful of that. Now there are lenders which I’m really pleased to say, that are beginning to come back down on their stress rates, which makes this really easy. Or, if you take out a five-year fixed, they’ll let you use that five-year fixed rate that you’re paying as the assessment rate. The way the lender looks is we’ve got a longer term tie-in with this client. Therefore they’re less of a risk to us. So therefore, we’re happy to make that a little bit easier. You just have to decide whether you want to be tied in for five years, especially if you’re looking to flip it, because the penalties might be high.
Dr James:
Got you OK, good stuff, very, very, very valuable info. That was a really interesting podcast. Actually. There was a ton of stuff there on Mortgages and just spelling it out really, really, really simple and I think we’re going to go with that podcast title that we suggested at the start LiI5, mortgages Boom. There we are. That was interesting stuff, matt. Thank you for that so much, matt. There will be people on the group who will hear this podcast and probably want to find out more about you. How can they get in touch?
Mattew:
Yeah, no problems, our website is rbmsolutionscouk, that’s romeo-bribomikesolutionscouk. We are on the standard socials as RBM Solutions on Instagram, facebook. I think my marketing lady’s even got us on the TikTok now, so we’re out and about there, or you can drop us an email on info at rbmsolutionscouk. And the RBM, in case you’re interested, is there’s my two eldest children, rhys and Blake, and M being Marsh. So there you go. That’s why we’re called RBM.
Dr James:
That’s nice, that’s fun. You haven’t danced on TikTok yet, then have you, is that? coming Not yet I refuse, I’m not doing it. Yet you know what? I made a TikTok just for fun, you know. I was just testing it out to see how it works and someone said to me or James, your TikTok account looks like dad’s just got TikTok. Do you know what it mean? Because the video is a little bit stingy, which actually hit me hard because I actually thought they were quite good. But there we go. Anyway, moving on, matt, it’s been really good to have you on the Dancing in the West podcast today. Let’s do another one very soon. I’ll see you later.