Welcome to our guide to property investment for beginners UK. In this article, we answer all of your questions to help you to start out in your property career, including ideal deposit, joint ventures, calculating yield and areas of the UK to consider.
Interest is charged on your mortgage because it is a loan. Less interest means your mortgage will be easier to handle, allowing you to keep your repayments under control and reducing the amount of money you’ll have to spend on your home in total. Mortgages with the finest – and lowest – interest rates are only available to those who have a substantial down payment. As a result, a 20% deposit will usually obtain you a mortgage with a cheaper interest rate than a mortgage that only requires a 10% deposit.
Keep this in mind as well. You can get the same discounts with a 15 percent deposit and a 17 percent deposit. You can only get better deals by increasing your percentage by 5% to 20%. There are no small stages — as you reach these milestones, such as 10%, 15%, 20%, and so on, you gain access to bigger discounts. When you put down a 20% deposit on a home, you might start to get some good mortgages. This means that a minimum deposit of 20% of the purchase price of your new house is recommended. This equates to £50,000 for a £250,000 property. That’s because a 20% deposit on a house is calculated by multiplying the price by 0.2. Normally people tend to deposit 25% and mortgage 75%.
So, £250,000 divided by 0.2 equals £50,000.
The loan-to-value ratio is a financial phrase used by lenders to describe the relationship between the amount borrowed and the value of the asset acquired. Lower LTVs imply higher deposits but better interest rates, vice versa.
The yield is the amount of money you get back on your investment. Divide the annual rent, less expenses, by the property price, then multiply by 100 to get a percentage.
Here’s an example. You could be able to purchase a £250,000 house. With annual costs of £1000, your rental income is £850 per month. We can figure out the yield by doing the following:
£850 * 12 Months = £10,200.
£10,200 – £1000 Expenses – £9200.
£9200/£250,000 Cost of house = 0.036
Rental Yield = 3.6%
Buy-to-let mortgages are designed for landlords who want to buy a home to rent out. The criteria for buy-to-let mortgages are like those for conventional mortgages, but there are a few important distinctions.
The maximum amount you can borrow is determined by the amount of rental income you anticipate. Lenders typically require that your rental income be 25–30% more than your mortgage payment. You can receive a BTL if you have a strong credit history and aren’t overextended on other debts, such as credit cards, you earn £25,000 per year, and you own your home outright or with an outstanding mortgage.
- The fees are usually substantially higher.
- Buy-to-let mortgages typically have higher interest rates.
- A buy-to-let mortgage normally requires a minimum deposit of 25% of the property’s worth (although it can vary between 20-40 percent).
- The majority of BTL mortgages are interest-only loans. This means you only pay the interest, not the principal, each month. You repay the original debt in full at the conclusion of the mortgage term. Repayment-based BTL mortgages are also available.
- The Financial Conduct Authority does not regulate most BTL mortgage lending (FCA). There are some exceptions, such as if you want to rent the property to a close relative (e.g., spouse, civil partner, child, grandparent, parent, or sibling). Consumer buy-to-let mortgages are sometimes referred to as consumer buy-to-let mortgages, and they are assessed using the same tight affordability guidelines as residential mortgages.
Investing with partners
A partnership investment is one in which two or more parties join forces to invest in real estate. The risk is shared, and you usually go into the partnership with each side offering something unique to the table, making it one of the most effective property investing strategies.
- The right partner might bring additional resources, such as finance or a large network, to the table.
- When it comes to dividing earnings and losses, a real estate partnership form gives both parties more freedom.
- When evaluating potential partnerships and investments, partners might bring a different perspective.
- When meeting with potential lenders, the combined portfolios of real estate partners can help bring the wow factor to the table.
- Balance is important in partnerships because it allows both parties to divide and conquer duties and burden.
- Earnings must be shared among the partners, lowering profit margins.
- Organizational conflict can arise when real estate partners have extremely different management approaches.
- There may be difficulty delegating obligations if the partnership agreement is not completely explicit (or losses).
- Partnerships can put an extra burden on a connection that is otherwise healthy.
- One partner may bring more to the table than the other, resulting in a mismatch in equity or expertise.
Process for purchasing an investment property – Stamp Duty
Have the cash ready/place an offer
The first step is to ensure that you can finish the transaction. No problem if you’re buying with cash: simply make sure you have enough in the bank to meet the purchase price, Stamp Duty, and other fees. Alternatively, if you intend to use a mortgage, you can request a DIP from your broker (Decision in principle). This indicates that the lender has examined your circumstances more closely and determined whether you are the type of person to whom they would lend money. After some time has passed, you may receive a call informing you that your offer has been accepted.
Get a Solicitor
- Your solicitor will receive the memorandum of sale from the estate agent and will be aware of the situation; however, you should contact them to find out what they require from you. Finding a competent solicitor is a topic in and of itself, however there are a few factors to keep in mind:
- Get a fixed-price quote for the transaction (the solicitor will need to know the purchase amount, whether you’re buying as a person or a company, whether you’re using a mortgage, and whether the property is freehold or leasehold)
- If you need anything done urgently, make sure they know about it right away and are prepared to act.
Arrange the Mortgage
Notify your mortgage advisor that your offer has been approved, and they’ll contact the lender. It could be the same lender who gave you a DIP before, but if better deals are now available or if the original lender doesn’t like this sort of property, they may approach someone else. Because your solicitor will handle both the legal and transactional parts of the mortgage, the lender will need your solicitor’s contact information.
Get a Survey
If you’re taking out a mortgage, your lender will conduct a property valuation survey before approving your loan and releasing the funds. This is merely a short check for them to make sure the pricing is appropriate, the rent would be sufficient, and the property fulfils their financing conditions. Furthermore, you have the option of conducting your own survey. A HomeBuyer Report, which costs roughly £300-£500 and inspects all the major aspects of a house, is a less expensive and more basic choice. It will give an opinion on whether any work is required for each item (such as the roof, flooring, and windows) as well as remarks for further inquiry. It’s up to you to decide whether this is worthwhile.
Preparation to Exchange
During this time, your mortgage lender will have reviewed their valuation study and may have asked some further questions about your finances (via your broker or advisor) to feel comfortable lending to you. They’ll eventually issue a formal mortgage offer, ensuring that the money will be available to you and allowing you a specific amount of time (usually three or six months) to complete the transaction. If the lender does not make an offer and then withdraws for some reason, everything will be put on hold while you look for a new lender.
Exchanging Contracts/Collection of Keys
Your solicitor will send the deposit to the vendor’s solicitor on the day of exchange. They’ll then talk to one other and “swap contracts” informally. Before the trade, a completion date will have been determined. It could happen on the same day as the transaction, but it’s also common to happen a few weeks afterward. Your solicitor will seek the mortgage funds from the lender prior to the completion date so that they are available for completion in their client account. They’ll also send you an account statement and request payments to cover the following expenses:
- Any outstanding money due after deducting the deposit and the mortgage advance.
- Any Stamp Duty that will be required after the project is completed
- Normally, their charges
Good UK Cities to invest
Because of the rental rates it can deliver, Liverpool is a strong contender for best place to invest in property in 2022. While price growth has been slower than some other options in the previous five years, Liverpool has some of the best rental yield postcodes in the country. L1, also referred as the Baltic Triangle, is one of Liverpool’s hottest areas, with a previous annual growth rate of 8.1 percent. The Royal Liverpool University Hospital is in L7, which has been known to produce yearly rental yields of 10%. According to JLL, housing prices in Liverpool will rise by 28% in the next four years, following the same trend as Manchester. The Liverpool Waters scheme, a £5 billion, 30-year plan aiming at developing new areas, increasing tourism, and creating roughly 17,000 new employments, will be one of the most significant in terms of regeneration for the city.
Birmingham is still one of the best cities to invest in 2022, following a trend that began in 2016. As more projects in the Big City Plan come to fruition, demand for the second city has never been higher – especially as preparations for the Commonwealth Games 2022 ramp up. Birmingham, according to Savills, will be one of the fastest expanding regions in the country over the next five years, with price increases of 24% expected by 2025. Rents have risen 30% in the last ten years and are forecast to rise another 12% in the next five, fuelled by renter demand from young professionals fleeing London and a growing population of 1.24 million people by 2030.
Manchester has maintained its reputation for the northern powerhouse, establishing itself as one of the most interesting investment destinations. According to Savills, future growth is likely to continue, with home prices expected to soar by 28%. This is partly due to the city’s rapidly expanding economy and population, both of which have achieved great strides in recent years. In the lettings market, Manchester remains a viable option to London. With a wide range of career opportunities in global businesses and employment growth of 84 percent between 2002 and 2015, the city is now the top destination for young professionals in the Northwest, only being beaten out by Midland’s destinations such as Birmingham, according to Hamptons International.
Leeds has quickly established itself as a significant city for investors seeking long-term rental income, earning a spot on our list of the top places to invest in UK property in 2022. Leeds, which has a population of 800,000 people, has a 73 percent rental rate, making it ideal for investors looking for constant tenant demand. While capital growth has been slow compared to the other cities on this list, rental demand in Leeds is rapidly increasing. Yorkshire, according to JLL, will rise by 28% over the next five years, owing to the demand as well as the completion of several Build-to-Rent initiatives. Leeds is one of the fastest developing cities in the UK, and it now competes with numerous European cities. This has had a significant impact on the chances available within the city, luring roughly 10% of those who leave London each year since 2018.