Buy to let finance
Housing prices have risen substantially in the last couple of years. Governments have also pitched in by subsidizing home loans, to make housing affordable to one and all.
Most of the homebuyers have bought their homes for the first time. These homes are for personal use.There are some who have chosen to buy these properties for letting them to third parties. These are almost always second or even third residential or commercial properties .
There are many advantages of buy to let properties. First and foremost, the future seems bright for renting out properties .This is because real estate prices have shot up all of a sudden, catching many people off guard. In process, many people are unable to afford purchasing homes, despite the fact that home finance is very cheap at the moment.
This group will be left with little choice but to take accommodations on rent, giving buy to let property owners a good and reliable business for many years to come.
Banks and governments have, so far, let only the first time homebuyers take the subsidized loans. But the gap between the demand for housing and the actual availability is so wide that sooner or later this policy may have to be revised. Keeping in view the rising rental charges, the first option before the governments would be to encourage buy to let finance .
As of now, banks charge higher interest rates on buy to let finance. This is because studies have shown a higher level of delinquency in these types of loans .This bad record could be because of the higher interest rates as well .The interest charged on buy to let finance is generally 1 percent above the banks base rate. Even flexibility of term, that is available to the first time homebuyer, is denied to buy to let homebuyer .The equated installments are, therefore, much higher than those applicable to home finance.
Banks also examine other economic factors relating to buy to let properties, such as location of the property, rent that the property would fetch, whether there are any industries, schools, and other infrastructure close by to ensure that the property remains rented throughout the loan term, condition of the property, and so on and so forth.
As a thumb rule, the banker is satisfied if the monthly rentals from buy to let properties are about 125 percent of the installment payable to the bank.
Despite the adverse conditions, buy to let properties still make sense because:
- The interest charged by the bank on buy to let finance is deductible from income for income tax purposes
- The installments paid on buy to let finance are still affordable, despite the higher interest rates.
- If the installments paid on buy to let finance is discounted at the inflation rates, the effective interest rates will be much lower than interest on business finance
- Properties underlying the buy to let finance mortgage increase in value over time. No tax is paid annually on this increase in property value .The tax liability crystallizes only when the property is sold .
- Even though buy to let properties are a type of business, the bankers do not view it as such. Therefore, the interest rates they charge on buy to let finance is much lower than other business finance .Similarly, the term applicable to such loans is also much longer than the normal business loans .Even governments do not treat this as a business, and therefore, taxes are lower .
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