From all previous posts I don’t think we at property know have ever talked about property for the older generation. If you’re over the age of 54, your property is most likely to be your biggest asset, if some of you readers are living in the UK you may have seen advertisements about releasing equity from your property, these sorts of advertisements are getting ever so popular recently. Now you might be asking what is equity? Equity is the market value of ones property minus the liability attached to the property which is generally a mortgage. Nowadays homeowners are given an opportunity to use equity release schemes to enable them to gain access to the equity in their property and then they can spend that money. The money can be paid as a lump sum, spread out over a period and used as a monthly income or used to buy annuity that will pay an income for life (for older homeowners looking for retirement). Providers of the schemes are fully regulated by the financial services authority, as are the brokers who give advice about equity release. The schemes available are home reversion plans and lifetime mortgages. Whichever scheme is chosen, you will be guaranteed the right to reside in your property until you sell the house, move into long term care or you die.
A lifetime mortgage is a mortgage secured against your property with no repayments to make until you move out or die. The advantages of using this is that you and your spouse (I am not to sure on civil partnerships at the moment) still own your property and will benefit from any increase in property value. Also if a “no negative equity” guarantee is implemented this ensures that regardless of what happens to house prices or interest rates, the final debt that needs to be repaid will not exceed the sale value of your property. But the downside is because none of the debt will have been paid during your lifetime, the interest will roll up for as long as you live in the property. The interest and original sum of money you borrowed will eventually have to be paid back by your property.
A home reversion plan unlike a lifetime mortgage is not a loan. You yourself will actually sell or a share of it to the equity release provider while at the same time retaining the right to live in the property rent free for the rest of your life. The advantage of this is that as it is not a loan there is no interest to pay. When the property is sold, the company will take a percentage of its value, if you sell 50% of your property then your estate is guaranteed to receive the other 50% of the property value as inheritance. The downside to his is since you will be still living in the property the scheme provider will not offer full market value for the percentage you are selling. If you die immediately after taking out the scheme you will have sold your home for far less then its worth. The amount offered for your share of the property will depend of your life expectancy. The greater your life expectancy, the less you will receive.
Let’s start off where we left off last time, as you know tax can be very taxing, bad joke I know. Making money from your property? – Part 2. Today we shall try and get through HMO’s, letting agents and student lets.
On the 6th of April 2006 it became mandatory that landlords acquired an HMO license if the accommodation they were letting fit into a certain criteria. A HMO License is a House in multiple occupation license, this change was under the Housing Act 2004 and it applies to any letting property which is
“• An entire house or flat which is let to three or more tenants who form two or more households and who share a kitchen, bathroom or toilet. a house which has been converted entirely into bedsits or other non-self-contained accommodation and which is let to three or more tenants who form two or more households and who share kitchen, bathroom or toilet facilities
• a converted house which contains one or more flats which are not wholly self contained (ie the flat does not contain within it a kitchen, bathroom and toilet) and which is occupied by three or more tenants who form two or more households
• a building which is converted entirely into self-contained flats if the conversion did not meet the standards of the 1991 Building Regulations and more than one-third of the flats are let on short-term tenancies
• in order to be an HMO the property must be used as the tenants’ only or main residence and it should be used solely or mainly to house tenants. Properties let to students and migrant workers will be treated as their only or main residence and the same will apply to properties which are used as domestic refuges
A HMO license is there to make sure that properties are suitable for occupation by the specified number of people. The licenses themselves are given by local authorities and they will want to check there are enough toilets, bathroom, cooking facilities and that the property is properly managed.” -UK Government Communities website
Student lets is a very popular first step into the buy to let world. These past years it has proven that these can be very good investments. Most of the time students are not as fussy when its comes to quality finishing’s, this means that if a landlord is intending to let to students they will not have to spend as much for the quality finishing’s and save a lot of start-up capital. But location and size is extremely important if your property is to succeed in the student market. Properties generally have to fairly close to campus and of decent size. Students like living together and bigger houses with 4-5 bedrooms are in high demand and go just as fast as small houses and flats. Another way to save money is the huge amount of advertising the universities and the local student unions do for student accommodation. As a landlord you will be able to advertise your property as a student let without even stepping foot into a estate agent or letting agent’s door step.
Letting Agents is like the easy mode for being a landlord. Letting agents take a lot of the hassle of being a landlord away at a price. Letting agents will usually help find a property to let. They will also do all the work when it comes to tenants and do all the required financial and tenant checks with all the appropriate references, prepare watertight tenancy agreements and draw up an inventory of the letting property contents. Usually lettings agents will charge a percentage of the rent as a finding fee and also an administration fee. Depending on the price, some letting agents will even collect the rent, arrange for repairs but not pay for them and carry out regular inspections on the property. They can be a good first choice if you are inexperienced and need a helping hand when it comes to your first rental property or just find that you can not handle everything that comes with being a landlord and just want someone to take the stress away from you. If you do decide to go with a letting agent make sure that they are a member of the Association of Residential Letting Agents (ARLA). That’s all for now on buy to let, hope to see you all soon.
From previous posts we have mentioned buying to let is an option that people should consider getting into. But becoming a landlord can be a scary and complicated procedure. The main worries when becoming a landlord are things like tax, HMO’s letting agents etc.
When tax is involved in anything it worries most of us, unless you use an accountant people are generally unsure about tax and when letting is involved it is no exception to tax. As a landlord you will be liable to pay income tax on the income received from renting . The tax you will be charged will be at the highest rate of income tax you pay. But there are ways to deduct the amount of rental tax you are required to pay as landlord.
• Fee’s (Letting Agents, Accountants)
• Insurance (White Goods, Gas Boilers, Plumbing)
• Advertising Costs for the property
• Cleaning Costs
• Maintenance Costs
• 10% of the annual rent after council tax, for maintenance
• Interest payments on the letting property
• Service charge, buildings and contents insurance during tenancy period
All the above can be deducted from the income made from the rent, this then in turn reduces the amount liable towards income tax.
Another tax that a landlord is liable to pay is CGT. Capital gains tax is a tax which is applied when a non inventory asset is sold for more then its bought price, in our case property. You would be CGT exempt if the let property was formally your former residence, but the property must be sold within 3 years it was turned into a rental property. CGT is calculated by taking away the original price from the sale price, you are only liable for CGT on “the gain” of the sale. (The gain is the profit made from the sale of the property, the part which is liable to be taxed by CGT) The proportion which the gain is taxable is dependant on the length of time you have owned the property. You would be liable for 100% of CGT on the gain if the property is sold within 3 years of acquisition. After the 3 years the proportion of CGT you are liable for is reduced by 5% per year. So after 3 years you would pay 95% CGT and after 4 years it would be at 90%. This will carry on going down until you have owned the property for 10 years , you will then be liable for 60% of CGT regardless of how many more then 10 years you have owned the property.
This is the end of part 1 of making money from your property stay tuned for part 2. Where we will talk about HMO’s, what you need to know about letting agents, student lets and more.
In recent news it has been pointed out that the targets set for housing will not be met. The government has set a target of 3 million new homes to be built by the year 2020. It will approximately need 240,000 homes built a year to meet the target that was set, last year just over 200,000 new homes were built. Unless changes are made now it will be more then likely that the target set will not be met.
Home builders have recently decided to cut back on the new builds due to the reduced demand from the falling market. Mr Nickell, who heads the national housing and planning advice unit said “Unless local authorities are given a strong incentive to allow house building in their locality, it seems to me very unlikely that we will hit the housing targets………And if you don’t keep building these houses the prices just keep going up relative to people’s incomes” Mr. Nickell believes apart from the credit crunch affecting consumers, local authorities and councils are not offering enough incentives to encourage the building of new homes.
Recent government figures have showed that new building of new homes have been down 5% compared to the same time in 2007. A statement from the Home Builders Federation has predicted that the building of new homes is not expected to rise.
“Right now the credit crunch is stopping people from getting the finance that people need to buy homes……… Longer term we need a better business environment and less regulatory cost to get the industry moving” This statement from the federation is backed up by recent news of big players in the industry, Barratt Developments and Taylor Wimpey to be in huge amount of debt. These two major players carry between them a total of £2.5 billion debt which is significantly more then their total market value. The credit crunch not only has affected consumers but the industry itself, the pinch felt by members of the industry has already forced one of them to put a halt on the building of new homes.
A visitor site posted a comment on the article (London Property Prices: Are they dropping?), about our views of why the London Property Market is still strong and why it will always be.
“London is the financial heart of the European Union (EU) and capital of one of only four trillion dollar economies in the EU with an infrastructure to match. The business infrastructure is being improved even further, because of London being selected as the venue for the ultimate global sporting occasion.”
So we are going to expand on the comment raised, and look at several points on why London is a financial hub. We will cover the “ultimate global sporting occasion” i.e. the Olympics 2012 later. London is one of the worlds Financial Hubs, even though there is a big uproar about the credit crunch and fears of a looming recession. Estate Agent Savills, estimates that £2 Billion will be spent from the “City Crowd” for 2008. This means that desirable areas in London such as South Kensington, Kensington High Street, May Fair etc will still be in high demand, even though there is a great deal of speculation and dropping property prices with the overall UK Property Market.
London has become a strong financial hub in the EU, due to its strength in Banking and Finance. Areas such as Canary Wharf, and more traditionally “The City” (Bank, Liverpool Street etc) have been centres of Banking and Finance for decades. And with the strength and stability of the UK Sterling (£) it has many advantages over other countries when it comes to the Exchange Rate and Forecasting.
Looking at London, and why companies like to conduct most business in London. We are going to take a simple look at Time Zones. The world has now become so small and to do business internationally is becoming increasingly easier. London is GMT (Greenwich Mean Time), and if a business has to call Asia it is only 6-8 hours ahead and if the company has to call North America it is only 5-8 hours behind. However if you are in Asia and want to do business with North America, it is roughly 12 hours ahead/behind - and vica versa. So if you wanted to contact your business associate in Asia and you were in America at 9am, that would mean that you would have to be in the office at 9pm however if you were in London/UK you would have to be in the office at 2pm-4pm, which is within normal working hours. Something as simple as that has a big impact on why many companies want to base their Head Quarters in London.
In previoius posts, it was said that prices were the lowest they have been for the past 30 years. The UK housing downfall has started prices are down 4.4% since last year and there are no signs of it slowing down. In the US despite attempts to slow down the drop, house prices continue to drop continually. The reason why the recession as some believe it to be is happening is quite well known. But the complications with house pricing are less obvious. Buyers and sellers should be careful of what’s ahead. However housing markets are not your average markets, they are not as volatile as other markets like oil. Houses just do not prove to be great assets anymore, people have to live in them and can not just sell when they feel that they can get a good price for it and neither can they just go and buy a property when it is cheap. Not to mention the all the other processes involved solicitors, tax and estate agents. The good points of a slow housing market is their prices adjust slowly and once they start to move they tend to keep moving in that direction for some time. This decline will not end anytime soon.
With that said, during a decline, prices are not the best way to determine the exact situation. With people being reluctant to move, anyone who does not have to sell stays where they are and people with the choice to buy wait to see if prices will fall further. The few transactions that do go ahead are like lagging indicators of the prices that would clear the market. A much better guide to the market is the transaction volumes concerned, the 30% drop said earlier in previous posts shows that the market is in a situation. Prices may seem stable but during a decline unless volumes have reached previous levels, beware of quicksand.
During declines bring confusing times, is how different areas and places can be so different. Prices in one location can be low while the other can have the sky as the limit. There can be many reasons for this but do not be fooled, nowhere is invulnerable to shifting house prices.
A rocky road ahead, like most of us predicted the housing market is slowing down, the property craze seems to have run its course and the bubble is about to burst. For many of us we have witnessed a turn in the economy. With the current economic situation in terms of the credit crunch it is affecting mortgage lenders there is no question about that. The credit crunch in the US has had a huge effect in the UK, there have been stricter controls to whom banks lend to, there has been a steep drop in mortgage lending, with less than 3000 products offered to consumers today compared to May 2007 in which there were as much as 11,000 products. This has made it increasingly difficult for first time buyers to get on the property ladder as they will have to save a lot more for deposits or wait till they get a better paying job but waiting for that could be too late. As more of us are watching our spending carefully, there seems to be fewer buyers out there and this will eventually cause an excessive supply of homes with a lack of demand, which could result in the price of properties continuing to fall dramatically.
Another blow to our pockets is the intensity of the cost of living, noticeably the price hikes in everyday essentials such as petrol and food, with this in mind many of us are holding back, that means stepping away from the property market, keeping every penny in our pockets and being extremely conservative with our spending. It looks set that the UK is about to follow suit of the Americans and possibly head towards a recession.
Although the government has tried to stimulate spending within the economy by cutting interest rates to 5%, this may not necessarily improve the situation within the property market for home owners. Reduced interest rates as well as declining house prices, has not boosted spending or maintained property value which has had a knock on effect on the wealth effect in which people perceive themselves to be richer but in this case are worse off, in which case the wealth effect is playing in the opposite direction of the fall in house prices. An example of this is when, with a £100k mortgage and a drop of 0.25% in interest rates would lead to fall in monthly payments of £21. On the other hand a drop in house prices of 0.25% a month would lead to a loss of equity of roughly £250 on a £100,000 property. The home owner ends up paying £21 less then usual a month but the house price drops makes the interest rate cut redundant making the home owner lose equity in the long run.
With the current economic state, getting a mortgage has become incredibly difficult as lenders have become quite demanding to who they will offer mortgages to and when they do offer them, the rate will not be cheap. Despite this, its not all bad news, as property prices seem to be unstable, more people are turning to renting, this new trend has increased rental prices for landlords and seen the sales of buy to let market rise in the past few months.
Just recently it has been predicted that the number of properties sold in the UK this year will be at its lowest for 30 years. Which is approximately 30% lower then 2007.
This prediction was made by a housing expert by the name of Richard Donnell. He made this prediction as an uncertain housing market is bringing about many would be first time buyers to wait and observe the market in case prices drop even further. We all know that the market is stabilizing and not booming as it once was. Don’t get me wrong its not totally flopped but a friend of mines apartments market value dropped £40,000 in the space of 3 months, it’s a good job they were buying to live and not buying to let. With these gloomy forecast properties are staying on much longer then they used too regardless if they are excellent buys the market is just so unpredictable nowadays it just knocks all the confidence out of the most poised buyer.
Another recent announcement from the council of mortgage lenders to dampen our spirits, they are predicting that there will be a 7% fall in prices in 2008.These announcements are like air raid sirens in the property world, reading from a newspaper a home seller was just finding impossible to get any interest to sell. They had to reduce asking prices by 15% to even get the faintest of interest. Eventually when they did get interest potential buyers are just sitting back and waiting for more house price falls and cashing in when they get cheaper. This is proving to be effective for the buyers but for the sellers some just can’t afford to cut prices. With more people renting instead of buying its making sellers jobs harder ten fold, making properties on the market stay for much longer and some just not being sold at all. One estate agent believes that house prices will drop by at least another 5% this year.
After huge speculation over the forth coming interest rates, people’s predictions have been confirmed. We at Rent Home Manchester, probably like most of you out there, believed this was going to be the inevitable outcome. On the 9th of November 2006, interest rates rose from 4.75% to 5%, its highest level since September 2001.
Mervyn King (head of Monetary Policy Committee); decided upon this rise due to number of reasons, firstly there has been a sharp increase in prices in all aspect of the economy. In particularly the housing market has seen considerable prices rises, as house price growth has exceeded expectations due to a shortage of supply. Following this we have seen positive economic growth, an increase in consumer confidence and in particular a substantial rise in energy prices.
The rise in interest rates is necessary in order to curb inflationary pressures, especially house prices which are continuing to rise about 8% every year, and at the same time needed to promote economic prosperity. However this news won’t come lightly to home owners, as this will no doubt increase their mortgage payments. For example a person with an £150.000 mortgage will expect roughly a £20 increase a month on their existing mortgage. Consequently this will place added debt problems with many more increasingly finding it difficult to make repayments readily, on an already over stretched debt nation.
Although we at Rent a Home Manchester, believe the rise in interest rates won’t have a significant effect on peoples spending habits, nor will it cool down the property market. As we have seen in the past years it hasn’t been borrowing costs affecting the housing market, instead it has been the supply and demand of houses. We are still witnessing a shortage of supply and considerable high demand; therefore prices can only continue to rise rapidly. We expect property prices to rise in the near future, due to the consequence of population growth, especially the expansion of the European Union, and a trend of number of people living alone, but remember this is only Rent a Home Manchester own opinion.
London – Property Market News
The Property Know Team Formerly the Rent A Home London Team; has randomly composed some interesting facts about London’s Property Market and Property News in general.
Did you know – that in FIVE (5) years from now, the average home will be £400, 000. Well that is for London only. Currently the average house price is £330, 000. Also the London Housing Federation are predicating that in five years time, you will need a salary averaging £80, 000 to get an “average” mortgage! For your information: The average house price is calculated from the average from the; average price of a detached house, a semi-detached house, a terraced house and finally flats/apartments.
Do you watch Location, Location on Channel 4? Well from their Best and Worst Places to live for 2006 – London’s boroughs/areas scored the highest for, unfortunately, the worst places to live! Hackney came first, and tower Hamlets came second and Islington came fifth! So think twice – if you are planning to move there!
To have an atheistically pleasing bathroom or a new kitchen or not? Well in the view of the Rent A Home Team – we have always thought that it would be more beneficial and cost effective to either expand your property, by creating more space or adding another room (loft conversions etc). They both roughly cost the same price, and we all know that the more rooms the more expensive the property. A One bedroom house or a Two Bedroom house? You tell us! So do not jump into renovations, and calling your local builder to fit a new kitchen or go on a spending spree in B&Q or Homebase. You might splash around £2000 - £4000, and chances are in proportion of what you spend is what the increase in value will be! On the other hand – if you add another room you will hit the jackpot!
Sources: http://www.housing.org.uk/regions/aboutus.asp?region=4 & http://news.bbc.co.uk
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