26-06-2008
Worried about remortgaging your buy-to-let? Try saving
by Adfero
The credit crunch has injected a shot of caution into the buy-to-let market. Where previously properties were geared to maximise the use of capital, it now makes sense for landlords to keep equity in the property so that better rates can be secured on re-mortgage.
Buy-to-let mortgages have traditionally been given based on a loan-to-value of around 85% and the potential rental income being 125% of the mortgage payment. However in the current climate it is wise to have other interests that the bank could take into account when considering a re-mortgage application.
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And while it may not immediately appear to be the best solution, a regular savings strategy could put you in a stronger position. Proof of owning a general savings account or an individual savings account (ISA) could indicate to your mortgage lender that you are not only able to cover your mortgage payments, but are also prepared for the possibility of negative equity.
Make your money work
There are a number of different savings options to choose from. The Newcastle Building Society believes that it is essential that consumers save in a way that makes their finances work "as hard as possible". They also note that saving with a building society is a safe choice, with the added benefit of offering competitive investment returns.
"The main savings concern consumers should have at present is ensuring that their money is working as hard as possible for them, especially in uncertain economic times," said Steve Urwin, senior marketing executive at the Newcastle Building Society.
"The lending and funding position of a building society is markedly different to that of banks."
According to Mr Urwin, mutual building societies tend to secure funding from customers rather than wholesale funding markets.
Consider the options
There are a number of different savings products available from an large number of providers. One of the most popular ways of saving is to set up an Individual Savings Account or ISA. ISAs tend to offer higher rates of interest and returns are also exempt from any tax charges.
There are two types of ISA and you can open one of each per financial year. A Cash ISA allows for an annual savings limit of £3,600 and a Stocks and Shares ISA has the same limit for customers who also have a Cash ISA or a limit of £7,200 for those with without. In the UK a financial year runs from April 6th to April 5th.
Most Cash ISAs act like regular savings accounts, where you can take money out whenever you like. Therefore they can be the perfect vehicles for saving any spare rent.
Regular savings accounts can also be helpful, especially if they are flexible regarding money transfers. However the interest is not tax free, therefore many people have a combination of both ISA and savings account.
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Avoid the ostrich approach
Above all, no matter what the strategy for saving cash, avoid the approach of the ostrich and do not do the financial equivalent of sticking ones head in the sand. It is easy to leave preparations for a re-mortgage until the last minute, hoping that the market will improve. However the current property market trend looks set to continue, therefore it makes sense to take action now.
Leaving spare cash in a low interest current account or saving it at home is counter-productive according to Newcastle Building Society. They warn that, in addition to the "obvious" dangers associated with leaving funds at home, not making money work within a high interest account will actually make it lose value given the effects of inflation.
"The biggest thing for savers to remember is that cash on its own does not earn any interest. Therefore, the effects of inflation will erode the relative value of cash over a period of time," said Mr Urwin.
And so, the best course of action is to prepare as far ahead as possible and start saving now. If unsure it may be worth speaking to a financial adviser. Before it’s too late, make sure that any expected or unexpected mortgage payment increases are budgeted. It always pays to be ready for the worst case scenario by giving yourself a bit more peace of mind.
