Category: Financial News

If you fall behind with your mortgage repayments and cannot catch up again, you could eventually lose your home. But you can take steps to protect yourself against this risk by taking out Mortgage Payment Protection Insurance (MPPI).

Q. What is MPPI?
A. Mortgage Payment Protection Insurance (MPPI) pays your monthly mortgage payments for a specified period if you suffer accident, sickness, or unemployment. Lenders and insurers have agreed to adopt certain minimum standards for MPPI, so you can be confident that the level of cover you will be offered meets or exceeds these.

Q. How does MPPI work?
A. You pay a premium each month while the mortgage is running. If you become unemployed, or unable to work due to accident or sickness, the policy starts to pay out (usually direct to your lender) to pay your mortgage.

To keep the cost of the insurance down, there are some periods where you will not be covered (you should check the individual policy for exact details). The main ones are an “exclusion period” of up to 60 days when you first take out your policy, during which any claim for unemployment would not be met (although claims for accident or sickness would be paid). In addition, there is an “excess” or “waiting” period of up to 60 days for each claim, during which no payments will be made.

So it makes sense to try to keep enough money in savings to cover two months worth of mortgage payments, even if you have MPPI. There are some circumstances when MPPI will not cover you – for example, unemployment caused by misconduct, or that you knew was impending at the time you took out the insurance, or sickness claims caused by certain pre-existing medical conditions.

Q. How does it work if I have a joint mortgage with someone else?
A. The MPPI can be set up so that it covers both of you, usually by allocating a proportion of the MPPI to each person (e.g. 50/50 or 60/40). If one person needs to claim, then the amount of the benefit payment will be the proportion of the MPPI allocated to that person. It is also possible to allocate the MPPI on a 100/100 basis, so that 100 per cent of the MPPI is paid, even if only one of the joint borrowers loses their income. This type of arrangement will generally require higher premiums.

Q. What if I am self-employed or on a contract?
A. You will generally be able to take out MPPI even if you are self-employed or on a contract. But make sure you check the details of the circumstances in which you can make an unemployment claim.

Q. How do I buy MPPI?
A. If you are taking out a new mortgage, you will probably be offered MPPI by your lender or the intermediary arranging your mortgage. Unless the MPPI is part of a mortgage “package”, it is up to you whether you take the MPPI offered with the mortgage or to buy it from elsewhere. If you already have a mortgage, you may be able to buy MPPI from your lender, or through an insurance broker, or direct from an insurance company. MPPI is usually cheaper (and the terms may be more generous) if you take it out at the time you start your mortgage, rather than leaving it until you have had your mortgage running for a while.

Q. What happens if I need to claim?
A. Your policy document will tell you how to claim. Usually, you need to obtain a claim form, complete it and send it to your insurer, together with some evidence (such as a redundancy notice) to support your claim. If you take a temporary job, then provided you let your insurer know beforehand, you can interrupt a claim without having to pass the 60 day excess period again when your temporary employment ends.

Q. What do you need?
A. Most people should consider taking out full MPPI, covering the full amount of the mortgage payments following accident, sickness or unemployment, and this is what you will generally be offered in the first instance. But if you already have other cover -such as accident or sickness cover from your employer, Income Protection or Critical Illness insurance or substantial levels of savings – you may decide that you do not need the full level of MPPI insurance.

If so, you may decide to “top up” your existing cover (perhaps by taking out the unemployment-only element of MPPI), or you may decide that you do not wish to take out MPPI at all. But be very careful that you are not being over-optimistic about your ability to meet your mortgage and other commitments if you decide not to take out MPPI. If you decide not to take out MPPI cover, your lender or intermediary may ask you to sign your confirmation that this is the decision you have reached, after considering all the circumstances.

Signing this confirmation will not affect the willingness of your lender to try to help you if you do not take out MPPI and subsequently fall into arrears with your mortgage repayments at a later date. However, if you have MPPI or some other form of protection, both you and your lender will have greater scope for dealing with payment difficulties.

The British love affair with property investing has been very evident over the past decade and despite a tougher market, those looking to get into the market should beware of easy buy-to-let deals and still make sure their investment meets a strict checklist, or dreams of property riches may turn into financial disaster.

Remember, buying a buy-to-let property is a business decision, and you must ensure the figures add up, no matter how desperate you are to invest in property. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties. The increased availability of loans at attractive rates of interest for buy-to-let purchasers increased the appeal of owning rental property.
When you buy a property to let out, you are becoming a landlord. And owning investment property is not like owning your own home. Instead you are effectively running a small business.

Before you choose a property and arrange the finance to purchase it, there are a number of factors you should look into.

Choosing a property

Researching your market
You should carefully research the market where you want to buy your property. You can either do this yourself or employ a specialist letting agent to help you find the area and property you are looking for. If you research the market yourself, you will need to gather information from estate agents, local papers, local employers and even the local authority, about the demand for and supply of, rented housing.

Finding your tenants
You will also want to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements. It is important to remember your property should have features that are attractive to would-be tenants, rather than would-be purchasers.

Choosing your location
You should also look at how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school-age children, how close the nearest schools are, will be an important influence on where they choose to rent.

Choosing your property’s size and condition
Equally, you should think carefully about buying a property whose size is attractive to households looking for rented accommodation in that location. As well as the size, type and location of your property, what about its condition? Have you assessed whether the property will require expensive maintenance? Generally speaking, older homes require more attention.

Choosing a property you can afford
Obviously, the size of mortgage you can afford will have a major influence on the size and location of your property. You also need to considers how much to spend on a property and should bear in mind that as well as increasing in value, your property can also fall in value.

Managing your property

Your responsibilities
When you have chosen a property, you will need to decide who will manage it for you.

If you manage it yourself, you will be responsible for:

finding tenants
checking tenants’ references
collecting the rent and maintaining the property
and dealing with problems

Your legal responsibilities
You will also need to be aware of your legal responsibilities as a landlord such as:

carrying out repairs

ensuring the safety of gas and electrical appliances

and ensuring that the furniture and furnishings meet fire safety requirements

You should also consider familiarising yourself with landlord and tenant law, to understand your responsibilities as a landlord, and the rights your tenants enjoy. This is an area you may wish to take legal advice about. The Department of Communities and Local Government (DCLG) have published a useful free guide for landlords in England and Wales called “Assured and assured shorthold tenancies: a guide for landlords.”

When your property is empty
You should remember there may be periods when you are unable to find tenants for your property and it will be empty, with no rental income coming in. Obviously you will still be expected to continue repaying your mortgage so you will need to think about how you will meet your mortgage repayments in these circumstances. This could particularly apply if you choose a property in an area where the supply of rental property exceeds demand from tenants.

Maintaining your property
As well as managing your property, you will be responsible for maintaining it. Besides repairs and regular maintenance, properties can benefit from routine improvements which maintain their attractiveness with would-be tenants. You may find that your property is in need of an overhaul after a tenancy finishes. Naturally, you will have to finance this yourself. What is more, your property is likely to be empty and you will not receive a rental income, while your property is being improved.

Using a managing agent
Given the number of different responsibilities you face as a landlord and the limitations on your own time, you may wish to use a managing agent to look after your property for you. This could cost you approximately 10 per cent to 15 per cent of your monthly rental income.

Choosing a mortgage

Paying for your property 
Obviously, when you choose a property, you will need to ask yourself how much you can afford to pay, and how you will pay for it? If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow. The size of the loan is usually linked to the expected rental income. As a guide, your lender will expect your monthly rental income to be 25 per cent to 50 per cent greater than your monthly mortgage payments.

Your choice of mortgage
When you choose a mortgage, your choice will be between a repayment mortgage or an interest-only loan. With an interest only mortgage, some lenders may require you to have a suitable investment product. If you have a repayment mortgage, some lenders may also advise you to arrange life insurance alongside your loan. You may be able to choose between fixed rate and variable rate mortgages. Fixed rate loans will give you some certainty about your mortgage repayments whilst variable rate loans could move up or down. You should also remember that your mortgage payments could rise if interest rates rise, depending on the type of mortgage you have.

What will your costs be?

As well as your mortgage payments, you will need to pay for:

buildings insurance

consider contents cover, if your property is furnished

maintenance costs

periods when you are receiving no rental income because the property is empty or the tenants have fallen behind with their payments

mortgage repayment increases because of interest rate rises, which you may not be able to recover immediately from rent increases

Your tax liability
Before you can calculate what your income from your property will be after taking into account all necessary expenditure, you should recognise that the profits from renting property are taxable. However, you will be able to offset some of the costs you incur as a landlord against tax. You will have to pay the following taxes:

Income tax

Stamp Duty when you buy your property

Capital Gains Tax when you sell it

Landlords have been buying more properties in the last quarter according to a recent survey. The Association of Residential Letting Agents (ARLA) quarterly survey revealed a “bounce back” in the buy-to-let market.

In the ARLA members’ survey of the Private Rented Sector (PRS) for the second quarter of this year, nearly twice as many ARLA members reported landlords are buying more properties.

The Bank of England’s decision to cut interest rates to historic lows over the past year has also helped struggling landlords, according to ARLA. Half of those surveyed said they thought the cuts are tempting investor landlords back to the market because of the minimal interest to savings rates.

Ian Potter, operations manager of ARLA, said: “Each quarter we glimpse a bit more activity as the bargains get snapped up and confidence is restored in buy-to-let as a viable long-term investment vehicle, particularly if the returns are rising too.

“The government has started to look at the PRS a bit more closely, recognising just how important it is to the property market as a whole.

“Some initiatives, such as the interest rate cut, appear to be having an effect albeit indirectly but there’s still a long way to go to. However it is fair to say that these signs are encouraging and I’m hopeful that this may mean that we’re starting to see the bottoming out of the market.”

The ARLA survey also indicated the rise in buy-to-let activity could be as a result of “increased average weighted rental returns”. Houses had risen from 4.8 per cent to 5.1 per cent, with flats up from 4.9 per cent to 5.0 per cent. Returns for flats remained consistent throughout the UK.

However, optimism is muted in the buy-to-let market by the lack of buy-to-let mortgages on the market.