Guide to Business Mortgages
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Download GuideProperty investment can be a very effective way of generating income if managed correctly, however, it doesn’t come without its risks. If you plan to buy your property with a mortgage and you are relying on the rental income to make your mortgage repayments, you must consider how you will keep up the repayments if you are unable to secure a tenant and the property is left unoccupied.
A period without a tenant is not the only risk that needs to be considered; major repairs could increase overall costs and of course the housing market on its own can have an impact on your potential profit margin.
We would strongly recommend that you take professional advice before entering into any property related transaction.
You may also wish to contact a conveyancer (for advice on the Housing Act and associated forms of tenancy) and an accountant (for advice on income and capital gains tax implications).
The Council of Mortgage Lenders provides free publications which may also help you in your research.
The Association of Residential Letting Agents is also available to offer advice.
Buying a property to let is very different from buying your own home. Consider the following before you start your search for a property:
Do your research
Research the market, with the help of your local estate and lettings agents, who will be able to advise on demand and any other issues in the area you are thinking of buying in.
Ask an expert
Speak to a letting agent and make sure you have a professional opinion of the level of income you can expect from the property or area you are looking to buy. Cumberland Estate Agent’s experienced lettings staff can provide you with free advice on any properties you are thinking of buying.
Know the demand
Buying where there is no rental demand is a surprisingly common mistake. Make sure you are not investing in a market which is already saturated with the sort of property you have to offer, and do not be misled by stories of fast profits.
Understand your finances
Keep in mind whether you are in the market for capital gain when you sell or simply monthly rental income. This will help you decide what to buy and where, and what kind of mortgage you need. Understand the rental yields particularly if the net rental yield figure is less than the cost of the mortgage, leaving you with a shortfall.
Buy carefully
Make sure you buy a property which allows for sufficient profit margin. Do not go for a ‘bargain’ property which may require considerable work. Major repairs require time and effort and paying more for a property which is in better condition can be a wiser move.
Check for safety
By law you must make sure that the property you are letting complies with various safety regulations, such as furniture and furnishings fire safety, gas safety, electrical equipment safety and that it contains a smoke detector. You will also need certificates to prove these regulations have been met.
Be aware of new and updated regulations
Failure to comply with the law can result in serious consequences. The best way to make sure you are kept up to date is to use an ARLA agent who can make you aware of them, while also ensuring you comply.
Know your responsibilities
Landlords, tenants and agents have different responsibilities, and it is important to know where these lie. As the landlord you will be expected to pay buildings insurance, ground rent and service charges and insure and maintain any items you leave in the property. Your letting agent will be able to advise on others’ responsibilities as part of your contract.
Prepare for voids
Your property may be empty and not generate any income for periods of time, and you need to be ready for this. Advertising for new tenants, decorating and maintenance of your property could take some time and you should have plans in place for when this happens.
Tax implications
A Buy to Let investment attracts several different taxes. Aside from Stamp Duty Land Tax, which you have to pay when you purchase any Buy to Let property, you may also have to pay Income Tax on the rent you receive and Capital Gains Tax when you sell the property. Rental income must be declared on a Self Assessment tax return. However, you can deduct costs such as mortgage interest and letting agency fees from the rent you receive first. And like anything else you own, a Buy to Let property will form part of your estate for Inheritance Tax purposes. We recommend that you speak to an accountant for further details.
Engage a managing or letting agent
Knowing where to advertise your property, how to vet your tenants and the kind of lease you should use can be tricky if you have no experience. Being a landlord is a full time responsibility, 365 days a year and is best not left to friends or family. A good agent will find tenants, do background checks, draw up the lease, collect rent, and inspect the property, thereby removing much of the hassle involved. When choosing an agent, landlords should use an ARLA Licensed member. They are members of a regulatory body and are subject to control and regulation. They will ensure that your property is handled safely and with care. Cumberland Estate Agents is ARLA licensed and offers a full Lettings service.
You may have found a property before you read this or you may not have started looking. No matter what stage you’re at you should speak with us before you commit yourself to a property, to make sure you can afford it and can raise the necessary finance.
To help us assess each application we may ask for some or all of the following:
The next step will be to fill in the mortgage application form. Once the mortgage application form has been completed, we will ask you to pay the mortgage valuation fee so that we can send a professional valuer to report on the property to make sure we can lend what you need.
If you have not already done so, you will need to instruct a conveyancer to handle the legal details (procedures for buying property in Scotland are different from the system in England and Wales so it is important to contact a conveyancer at an early
stage for guidance).
We will then check your application and obtain any necessary references and a valuation report. This usually takes two to three weeks, but we can normally give an
immediate “in principle” decision.
We will then send you written confirmation of the mortgage. This is called the “Offer of Loan.” We will also send a copy of the Offer of Loan and our instructions to your conveyancer. In certain circumstances the Society will need to obtain separate legal
representation. We will explain this to you if appropriate during the application procedure.
The amount of the monthly mortgage payment depends on:
Take all these points into account and with the help of a written illustration you should have a good idea of how much your mortgage will cost each month.
We will normally ask a valuer to visit the property to be mortgaged and to produce a report. Once the valuer has visited the property any valuation fee you may have paid cannot be refunded, even if you decide not to proceed with your mortgage.
You will receive a copy of the report. If the report recommends that repairs or improvements need to be done, you should make sure these are completed properly.
We arrange a mortgage valuation report to help us decide whether a property is suitable for the mortgage you need. Our own valuer or a qualified firm of valuers or surveyors approved by us will prepare the report. It is, however, not a full survey. If the report does not highlight any faults this does not mean that none exist. Valuations for mortgage purposes may be lower than asking prices quoted by estate agents. This is because the Society’s valuers base the valuation for mortgage purposes on actual prices achieved on the sale of comparable properties rather than the hoped for asking prices quoted by an estate agent.
We strongly advise that you obtain a more detailed report. If you want this type of report please tell us when you apply for a mortgage. We can put you in touch with a surveyor to discuss your requirements and the fee involved.
Fees will, therefore, vary but we shall agree the costs with you before instructing the valuer. The valuation on which we base the amount we can lend is the market value of the property including any goodwill and fixtures and fittings.
We will give you details of the different types of interest rates that are available (for example variable or fixed rates), Contact Us.
The interest rate which will apply to your account at the beginning of the loan will be shown in your Offer of Loan. If the interest rate changes between the time that you receive your Offer of Loan and the time when your mortgage is completed we will tell you.
On variable rate loans we may change the interest rate from time to time. The interest rate may go up or down. When we increase the interest rate we will always give you advance notice of the new rate and the date it becomes effective. The notice will be given by either writing to you individually or by placing an advertisement in a national newspaper.
We calculate interest on the ‘daily interest’ basis and charge the interest to your account each month. If you borrow extra, interest will be charged from the day the additional borrowing starts. Any items such as charges, fees, mortgage interest and insurance premiums, which are not paid by the last day of the month in which they are due, will result in additional interest being charged until the payment is made.
There are two ways of repaying your loan – repayment and interest only. We will give you details of the different repayment methods and repayment periods that are available. If you choose to pay only interest on your loan then we will give you a general description of the ways in which you can repay the capital.
This type of mortgage involves repayment of the capital gradually over an agreed period. Each monthly payment you make consists of two parts, interest on the loan and part repayment of the capital. In the first few years most of your monthly payment simply covers the interest with only a small amount going towards repayment of the capital. The repayment part of your monthly payment will, however, increase as the remaining mortgage term and the amount of the capital reduces. Provided you keep up your monthly payments the capital will be repaid at the end of the agreed mortgage period. With this type of mortgage it is recommended that you take out life assurance sufficient to repay the capital in the event of a critical illness or if you should die before the end of the mortgage term. The amount of interest you pay will vary if we make any changes to the interest rate payable on your mortgage.
With an interest only mortgage you make a monthly payment to us to cover the interest on the loan. The loan amount will remain the same and the interest is payable on the total amount of the loan for the whole of the mortgage period. The amount of interest you pay will vary if we make any changes to the interest rate
payable on your mortgage.
To repay an interest only mortgage you will usually need to ensure you have a suitable investment plan which will pay off the mortgage at the end of the agreed term. This normally involves the payment of a monthly premium to a life company or other provider. The premium is calculated to try to ensure that the money from the investment plan is sufficient to repay the capital within the agreed term. There is, however, no guarantee that the amount you receive will pay the mortgage off in full.
We will tell you what will happen if you do not make suitable arrangements to repay the capital and that it is your responsibility to ensure that an adequate repayment method is in place. We will also advise you that it is your responsibility to ensure any investment plan premiums are paid direct to the company concerned. If you want to use an existing investment plan, such as an endowment policy, you will have to ensure that it is adequate for the loan. If you surrender or stop paying premiums into an investment plan it can have adverse financial consequences, eg. you may not be able to get back what you have paid into the plan and you may lose valuable life cover. You would also need to make alternative arrangements to repay the loan amount within the agreed mortgage term. The lump sum from these types of policies depends on the investment returns that are achieved with your money. You should bear in mind that it is this lump sum that will be used to repay your mortgage.
If you intend to repay the capital by other means, eg. the sale of the property or other assets, we will ask you to clarify and detail these plans.
It is important that you regularly check the value of your investment plan to ensure that it is growing at a sufficient rate to enable you to repay your mortgage at the end of its term.
We will remind you each year of the need to ensure that you have an adequate repayment method in place.
Please remember that with most investment plans, the value of an investment can fall as well as rise and therefore future values cannot be guaranteed.
A Buy-to-Let mortgage is usually available for a minimum of 3 years up to a maximum of 25 years.
As a condition of any mortgage you will need to ensure that the property is adequately insured (e.g. buildings insurance) however this insurance doesn't have to be arranged through us.
We strongly advise you to ensure you have adequate life assurance to protect your mortgage in the event of critical illness or death. If you would like details and a quotation, please ask any of our Business Lending Managers.
Mortgage payments are due on the last business day of each month. Your first part month’s payment is an interest only payment and the amount will depend on the day of the month the mortgage starts. So unless the mortgage starts on the first day of the month and is an “interest only” loan the first payment will differ from the normal monthly payment quoted in the Offer of Loan.
The first part-month’s payment will be collected at the end of the second month with that month’s regular monthly payment, which is when your chosen method of payment (see below) will commence.
You can pay by:
If your mortgage is still within an early repayment charge period, you may be able to make overpayments, subject to restrictions. At the end of any early repayment charge period there are no restrictions to the level of overpayments you can make. If at
anytime you wish to make a lump sum payment of £500 or more off your mortgage, and you would like us to calculate a reduced monthly payment, please ask us to arrange this at the time you make the payment. It is however important to note there may be an early repayment charge. Please ask for details before repaying a lump sum.
Yes, every April we send you a statement showing the interest and any other items which may have been added, the payments you have made and the amount you still have to pay.
If you make your monthly payment by regular “internal transfer” from a Cumberland account, or by variable direct debit the Cumberland will collect the new payment automatically.
If you repay your mortgage early or, for example, you cancel your endowment policy, personal equity plan, pension plan or Individual Savings Account intended to repay the mortgage, or there is a change in your personal circumstances (for example you have a long term illness or you have a relationship breakdown) this may seriously harm your financial position.
It is important to remember that if your mortgage is in joint names, you are both liable for the mortgage and the mortgage related payments. This applies even if you have a relationship breakdown and one of you is no longer living in the property
We appreciate that your circumstances may at some time in the future change and you may experience temporary financial difficulties.
We will consider cases of financial difficulty and mortgage arrears sympathetically. Our first step will be to try to contact you to discuss the matter. It is important that if you find yourself in financial difficulties then you let us know as soon as possible. We will do all we can to help you to overcome your difficulties. The sooner we discuss your problems, the easier it will be for both of us to find a solution. The more you tell us about your full financial circumstances, the more we may be able to help.
If you are in difficulties you can also get help and advice from debt counselling organisations. At your request and with your consent we will liaise, wherever possible, with those debt counselling organisations we recognise, for example:
Yes, however, you may also have to pay an early repayment charge. Details are shown in the Mortgage Application Form, the illustration and the Offer of Loan which you will be asked to sign when you make your mortgage application.
In addition, there will be a fee for the administration work involved when you finally repay your mortgage. A list of current fees is given in our leaflet “Tariff of Mortgage Charges” which is available from any Cumberland branch.