Second Home Loan: Headache or Helpful?

Second Home Loan: Headache or Helpful?

We all know that we can take a second mortgage for up to the amount of equity we?ve built in our home loan with our payments, but when is it a good idea to do that? Is it a good thing or a bad thing? Should we use that money or leave it alone? The answer is the same as the answer to most complicated questions like this, especially those having to do with financial choices: it depends.

It depends on many factors:

How much will you pay to borrow against your home equity? Will you pay points again? How long will you have to repay the loan? At what interest rate? Should you borrow the full amount? Or less? How will the money be used?

Second home loans can be a double-edged sword. On the one hand, it?s your equity and you can re-borrow it if it is worth the cost to you. On the other hand, what if something changes? For example, your home loses value and you find yourself in debt for more than the value of the home? It can happen. Or, you borrow the money to invest it and the investment loses money and you are left with no profit and no equity, either?

Many people who are considering taking a second home loan are doing so to pay off higher interest debts or because they?ve lost a job or other source of income and need the money. It may feel like it?s your only choice. Is it? Be sure to check the cost of your options before you use your home equity for a second mortgage.

Ideally, you will want to get financial advice from a debt counselor or banker or financial planner. These professionals can help you to compare your choices and evaluate the risks of taking a second home loan. It may be helpful and they can help you avoid any potential headaches.

Tips for Choosing a Commercial Mortgage

A commercial mortgage is the most common way to finance the purchase of land or buildings for a business. It is often the most flexible and affordable solution.

How Does a Commercial Mortgage Work?
Commercial mortgages may be structured several different ways but the two most important aspects to consider are the interest rate type and the repayment schedule.

There are basically two interest rate options for you to consider...

Fixed Interest Rate: the interest rate applied remains constant for a set period that may or may not equal the length of your mortgage. The advantage of a fixed rate loan is that your interest rate and mortgage repayments are fixed and will not rise if the market rate rises. The disadvantage is that you will not benefit from any reduction if interest rates fall.

Variable Interest Rate: the interest rate applied fluctuates in line with changes to the Bank Base Rate or LIBOR rate and, as a result, so will the amount of your payments. Generally, you can initially get a lower interest rate on variable interest rate than on a fixed rate mortgage. The advantage of a variable rate mortgage is that you save money when the market rate decreases. The disadvantage is that the interest rate you pay can increase with the market rate.

When deciding on your repayment schedule you should remember the longer you take to payback the original mortgage loan the higher your total interest payment will be.

Advantages of a Commercial Mortgage

You retain ownership. Instead of raising funds by selling an interest in the property or the business, you retain complete ownership of both. The lender is only entitled to an interest return on its mortgage, not a percentage of ownership that an investor would expect. Also the lender can only exercise the right if you default. You retain all the benefits of ownership in an asset that has the potential to appreciate in value.

Improved cash flow. A commercial mortgage gives you access to capital with minimal up-front payments and the flexibility to design a repayment schedule that suits your needs.

Maximise financial leverage. Financing your property purchase with a mortgage will allow you to use your cash flow for other pressing needs.

Simplified cash flow management. Mortgage schedules are preset, making cash management more predictable.

Tax advantage. Interest payments on your mortgage are tax deductible and are made with pre-tax money. Purchases financed with profits, in contrast, are, made with after-tax money.

Disadvantages of a Commercial Mortgage

Mortgage collateral. The nature of a mortgage requires you to pledge the purchased property to the lender. If you default on the mortgage, the lender is able to foreclose upon the property and sell it to repay the money owed to the lender.

Defaults. The lender may define a variety of events that will constitute a default on the mortgage, including failure to make any payment on time, bankruptcy, insolvency and breaches of any obligations in the mortgage documents. Try to negotiate advance written notice of any alleged default, with a reasonable amount of time to settle the default.

Things to Watch out for

Arrangement fees. A commercial mortgage lender may charge up-front arrangement or processing fees. Check these fees carefully, and try to get an estimate as soon as possible to help you evaluate the overall mortgage cost.

Redemption penalties. You want to be free to pay off the mortgage (all or in part) at any time before its due date. Unfortunately a lot of lenders are likely to charge a redemption penalty in the first 3 to 5 years of the mortgage. After that initial period, you should make sure that your mortgage agreement gives you this flexibility and try to avoid a prepayment penalty for paying off the mortgage or part of the mortgage early.

Grace period. Try to get a grace period for any payments. For example, the monthly payments may come due on the first day of each month, but they wont be deemed late until the fifth day of the month.

Sale and leaseback. An alternative to mortgaging a property is to enter a sale and leaseback. In this transaction, you would sell the property to a buyer, who would immediately lease the property back to you. In this situation the main advantage is that the buyer would be required to find the financing for the purchase. However you have sold your ownership of the property and you would not benefit from any appreciation in its value.

Legal and professional Fees. Before you complete your purchase and ownership of the property passes to you, you will incur additional costs and fees for arranging the mortgage. Ensure that these are clear and reasonable before signing on the dotted line.

Best Buy to Let Mortgage Calculators

Want to increase your profits as a landlord? Learn how by finding the best buy to let mortgages. And whilst the Bank of England base rate is retained at just 4.5%, now is still a very good time to be considering property investment or simply refinancing any buy to let properties you already have to release equity for future purchases.

It would be easy to start saying just how easy it is to become a landlord and earn income from UK investment property and how you can simply sit back and watch the profit tumble in like a cascading waterfall. The reality is that there are a number of key issues that you will have to be involved in to ensure your investment property portfolio works to its optimum. With tenants to source and vet, an investment property to maintain, buy to let mortgages to arrange, letting agents to manage and accounts to monitor, it does take a certain level of commitment. So if you are still keen to have a slice of the much talked about property game then you will want to read on to find out how to get started?

PROPERTY MARKET 2006

Despite the negative press that the housing market experienced at the beginning of 2005, there are a number of reports circulating that suggest that figures have shown an increase towards the end of the year. This is of course good news at the end of what some predicted would be quite a difficult year in the housing market. There is of course the question of what will happen in 2006 and the property market. It is never a precise prediction as there can be many influencing factors but what we do know for certain is that over the last few months we have seen interest rates stabilize and property pricing stablising as a result of this.

So does that mean we should avoid investing in property until the market starts to increase again. In some respects many people might suggest that investing in property at any time is a good investment. When you consider that historically property has doubled in value, and sometimes tripled in value, every last 10-15 years, then it is likely to see you a good return on your investment if you are prepared to take a long term view. Plus, there still remains a high level of activity from Landlords and investors alike with a number of buy to let mortgage providers suggesting record levels of applications being received. For those looking for a get rich quick overnight scheme, then this is not for you. But when you consider the long term gains, it might be worth reading on and don?t forget that it is worth doing plenty of research and finding out as much as you can about investing in property. Perhaps pick up a Free Buy to Let Guide.

How to make ?166,500 in 15 years

According to research from the Centre for Economics and Business Research (CEBR), the average cost of a home in the UK could be ?300,000 by the year 2020. Currently that figure stands at around ?157,000 in 2005 which represents an increase over the next 15 years of 91%.

This figure of ?300,000 is achieved by the economic forecaster basing its prediction on the ever increasing population compared to a slower production of house building. As with many commodities, it is the result of lower supply and higher demand that will push up these prices.

With buy to let residential investment property, the maximum loan you can apply for is 85%. Based on an average value property in 2005 of ?157,000 this would require you to put down a deposit of 15% ?23,550 subject to valuation and rental cover which can vary between 115% to 130% in most cases.

Potentially over the next 15 years, this one investment could realize a return of ?166,550. This is based on selling the property at ?300,000 less the loan of 85% of the property value in 2005.

Over previous years there have been times when property has declined in value and other times where it has signifcantly increased in value but a good property investor will clearly see the benefits in both a rising and declining market and will utilize the facilities of a good buy to let mortgage provider to assist in this. For example:

During a rising market, a property investor may decide to use this window of opportunity to release some of that equity realized in the value of the property, to use for additional property investment. However, the property investor is less likely to use that capital released during a rising market. Instead, the landlord will wait until the market has re-stablised itself or experiencing a decline. At this point, they will then use this window of opportunity to purchase lower priced property and the circle continues. That is why property investors are in it for the long term and why they see the market as being profitable to them in all conditions. And when you consider that property prices only need to increase by an average of 4.4% year on year, it is easy to see why this type of investment is so achievable.

Successful property investors will do a lot of research on areas that they believe will become property hotspots and areas which are less likely to perform. There are many areas experiencing high levels of growth and financial investment with a lot of regeneration programmes in place or planned in the future. Even by simply monitoring publications such as Construction News can give a good indication of where new commercial premises are being built which can be a good indicator of new businesses moving to the area which it turn can lead to an increase in demand for property locally.

It is the general consensus that interest rates have stablised and there is even speculation of a drop but either way, they have been steady for a good number of months now. Slower capital growth does result in buyers having to put more effort into managing and developing their portfolios. And more importantly making a profit from property. Buying property at discounted prices can be done but you must do your homework to make sure they are genuine discounts and incentives. And don?t forget that in a slowing market, vendors will be more likely to listen to your offers. Albeit if they are a bit cheeky. In particular, you can use the negative press that is often surrounded by the property market to your advantage. For example when the media are circulating stories of a dropping property market, then vendors are even more keen to listen to your offers.

How to Get Started in Buy to Let

? Do as much research as you can. You can even get some free publications including Free Buy to Let Guides? Find out what properties are selling for. A good way of doing this is by contacting estate agents and researching on the internet. A good way is to look at property house price websites.? What is the level of demand for rental properties in the area? What type of property is most in demand. For example, if it is a university city, then the demand for shared student accommodation may be much higher than property for professional sharers.? Find out what rent is being achieved on those properties and the likely time to get the property let out. Speak to letting agents and local businesses that may be letting properties already in the area.? Raising deposits for your investment properties, may be easier than you think by releasing equity from any of your existing properties.

So how Do you know if you have bought a good investment

Well there is always an element of risk but providing you follow the main logic you should eliminate most of them. It is also important to make sure you continue to review your buy to let mortgage funding on a regular basis as this can have a big impact on your success and cash flow. As we have said above, the property market can rise as well as fall so providing that you have some cash funds in the bank to help you through any tougher market conditions then you could reap the rewards in years to come. But it?s important that you calculate these carefully into your projections to ensure that whatever funding you may need to input into the investment property that it will be outweighed by the eventual gain.

Providing that you are buying a good quality property in a good area with strong rental demand then it?s worth considering. Don?t just buy a property because it is cheap. You might buy a property at a very discounted price, but if you can?t let it, you could find yourself covering the buy to let mortgage payments for months to come which will see a big dent in your profits. Find out why it is cheap. Is there an increase in crime in the area, have plans been submitted for a large industrial unit to be built behind the garden etc, etc. Do your research. And don?t be afraid to develop a property for profit. Buying at the right price, in the right area and doing the right renovation on the property, can also see you return a decent profit. Re-financing the property on completion and letting it out could give you the best of both worlds.

Having taken into account all the considerations above, to calculate if it is a good investment, you need to ensure that your annual rental income exceeds the cost of your monthly buy to let mortgage repayments and maintenance costs. And it is more likely that your annual rental income will be stronger if you select an investment property in area with a strong and growing rental demand as it is less likely that you will experience rental voids and be supplementing the monthly buy to let repayments.

So in conclusion the property market is likely to remain a prime choice for property investors as long as they are will to commit to the long term.

Firstly, you need to establish if this is the right time for you to become a landlord and how much it is going to cost you. Can you afford to tie up money in a property? If the worst comes to the worst, can you afford to lose that money?

The simplest way to work out the repayments on a buy to let mortgage is to use an on-line buy to let mortgage calculator. These can help you work out the best buy to let mortgage product for the type of UK investment property you are considering and your individual circumstances. You will need to know the likely rent that can be achieved for the property as this will determine the maximum loan amount available against the purchase price or refinancing value of the buy to let property. Lenders normally suggest that the rental income each month represents at least 130 per cent of the monthly mortgage payment. Although there are some buy to let products calculated on ratios of as little as 115%. By working on these calculations, gives the investor a margin to cover the letting agents fees and other associated costs.

This is a long-term investment and you need to take the same approach to investing money into a house or flat as you would to buying into the stock market. Historically the value of properties have doubled every 10-15 years but that doesn?t mean to say that there won?t be peaks and troughs in between. These are times that you have to be prepared and most importantly can afford to ride through.

Increasing your returns by using buy to let finance to your advantage

For example, lets say you have ?100,000 cash to invest into Investment Property. Is it best to buy a property outright or use this money as deposits on multiple buy to let properties?

Mr Jones ? decides to use his ?100,000 to purchase a brand new property outright for cash. He lets the property for ?600 per month giving a return of ?7,200 per annum. Due to inflation, the rent will increase accordingly and eventually, after fluctuations in the property market, the house doubles in value.

Mr Smith ? decides to use ?100,000 as deposits (15% for each investment property) to buy ?500,000 worth of properties similar to the one Mr Jones bought. This results in Mr Smith receiving five times as much rental income, i.e. ?3,000 per month or ?36,000 per annum. The other ?400,000 is borrowed on buy to let mortgages and Mr Smith pays interest on this at a rate of approximately 5%. These monthly interest only repayments would work out to be ?20,000 per annum. Therefore, net of interest they receive ?16,000 per annum. Mr Smith is already better off than Mr Jones?.. but what happens in years to come? Well it is probably safe to say that Mr Jones?s rental income will rise with inflation as per Mr Smith. However, Mr Smith?s buy to let mortgage costs remain the same. Therefore, the gap between Mr Jones and Mr Smith?s rental income will continue to widen as time goes on. And finally after 10-15 years when property could have doubled again. Mr Jones would have made a capital gain of ?100,000 and have ?200,000 worth of investment property. Whereas, Mr Smith would have made ?500,000, which is five times as much capital gain!!

The most successful landlords will use some of the best buy to let mortages to fund their buy to lets and with buy to let mortgage products becoming more sophisticated and competitive the right buy to let financing can ensure you maintain your investment property portfolios in such a way that you are always working to the most optimum cashflow situation.

Best Buy to Let Mortgages

Finding the best buy to let mortgage is crucial to your success as a property investor. Unlike other forms of investment, a lot of the money you put into a buy to let property is likely to be borrowed. Over the last few years, the buy to let mortgage market has boomed, and borrowing money to invest in this way has become easier than ever. There are a number of different buy to let mortgage products available from fixed rates, discounted variable rates, discounted rates and so on. Different products may be suitable for different investment properties. And don?t be tempted to just go for the cheapest buy to let mortgage as there may be penalties that make it less attractive in the long term.

Always find out the best buy to let mortgage deals available at the time. Some investors may decide to retain their entire portfolio with one lender, but it?s important to realize that different buy to let products between different lenders can provide you with maximum flexibility and cashlow depending on how you structure your funding.

However it is very important that you get the correct guidance with your buy to let finance. You will often find that buy to let mortgage brokers have access to numerous different products and lenders and some can even offer exclusive products that wouldn?t necessarily be available to you if you approached the buy to let lender directly.

Questions that are worth considering when finding the best buy to let mortgage:

1. Do they have access to lots of different products in the market place?

2. Do they have the ability to create a long term property development strategy for you?

3. Are they able to secure Exclusive Products?

4. Are they able to arrange mortgages within 10 working days?

Most buy to let lenders will offer a maximum loan of 85% requiring you to fund at least a 15% deposit towards your UK investment property. The buy to let mortgage industry is very competitive with new products being launched on a very regular basis.

Some buy to let mortgage brokers may charge a brokerage fee up to 2% to arrange the buy to let finance for you but don?t let this put you off because if they do have the ability to secure exclusive products for you, it could be very beneficial to your cashflow as a landlord. Plus, if they are able to reach formal mortgage offer stage in a very short space of time, this could result in you being able to secure the investment property at very competitive prices if you have the ability to tell the vendor that you can have the deal completed within a matter of a few weeks.

How much you can borrow for the buy to let property will usually be worked out differently to how much you can borrow to buy your main home. Different lenders and different products carry different criteria for working out the maximum loans available. Some will lend on how much you earn, others on the rental income you achieve from the investment property. And sometimes a combination of the two.

How much rent will you make?

Before you agree on the purchase price of a buy to let property, it is important to find out from local letting agents, what the likely rent could be. They should be able to let you know which types of property are in highest demand and which areas are the most sought after for tenants. If you need to find out whether your potential buy to let is looking like a good investment, ask your broker/lender to work out the yield (ie the money you are investing and the rental income you will receive) on the property against what your repayments are likely to be. I you are investing in an up and coming area, it could still be a viable investment despite the figures not looking too healthy today. If you believe that the area will be having a lot of other investment or new businesses moving in, then there is the possibility that the surrounding property market will have a positive knock on effect. When the valuation is carried out on the property, the surveyor who visits the property will also be expected to give an assessment of the expected rent as well as the value of the property.

A local letting agent is the best person to approach for this kind of information - especially if you hint that you might let them be the property?s management agent.

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