Almas Uddin
Founder and Mortgage Advisor
11 Apr 2020
Wise Investments – Which Properties to Choose
Stamp duty is a major consideration when making investment decisions since different rates are applicable depending on whether your investment is a commercial, residential or dual-use property.
This payable duty is levied against purchases of property, whether land or buildings, throughout the UK. In Scotland, the levy is slightly different and is called a Land & Buildings Transactions Tax as opposed to Stamp Duty Land Tax.
The duty payable of 3% has been in place since 2016 and applies to purchases of non-primary residential properties, such as second premises or a buy-to-let. Many buy-to-let investors have had to diversify their investments due to the impact of this higher duty payable and are considering dual-use properties and commercial investments which carry a lower rate of stamp duty.
|
Purchase Price
|
Residential stamp duty plus 3% levy
|
Non-residential stamp duty for commercial or mixed-use properties
|
|
£200,000
|
£7,500
|
£1,000
|
|
£300,000
|
£14,000
|
£4,500
|
|
£500,000
|
£30,000
|
£15,500
|
|
£600,000
|
£38,000
|
£19,500
|
As shown, the duties payable for commercial or mixed-use properties are significantly lower than residential properties.
Properties that Qualify as Mixed-Use
Mixed-use properties are those with combined elements of residential and commercial premises. For example, a shop with a flat on the upper floor. Due to the commercial nature of part of the property, a commercial mortgage must be used to finance the purchase as a buy-to-let mortgage is not available on properties with any commercial element.
As an investment acquisition, a dual-use property tends to offer a higher yield than a typical buy-to-let, which compares at around 7.8% gross yield in comparison to an average 5.5% yield for buy-to-let.
Commercial Mortgages for Buy-to-Let Landlords
Our expert team can advise on the best commercial mortgage solution for your investment. The most suitable products depend on your experience as a landlord and the size of your existing property portfolio.
Mixed-use investments tend to offer higher yields and lower investment values and the viability of the investment is considered alongside other factors such as the property location, structural integrity and intended use.
Commercial Mortgages for Businesses & Individuals
There isn’t currently a great deal of difference between the availability of commercial mortgages for dual-use properties for individuals or for corporations. What does impact the application, is the anticipated yield from rental incomes, and the outcome of the underwriting process. This considers:
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The applicant’s background and experience
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The asset and liability statement submitted as part of the application
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The investors current investment portfolio and its value
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Their income and liquidity
Commercial vs Residential Investments
All investments carry varied risks and rewards, but if you are deciding between commercial and residential property investments, below are some scenarios based on South East properties, and considering a tracker mortgage rate taken out through a registered limited company.
|
Investment Cost
|
Commercial or Dual-Use
|
Residential Property
|
|
Property price
|
£250,000
|
£250,000
|
|
Annual rental income
|
£22,000
£11,000 pa from shop
£11,000 pa 2 flats above shop
|
£13,200
3-bed house let to a family
|
|
Stamp duty payable
|
£2,000
|
£10,000
|
|
Deposit
|
£62,500
|
£62,500
|
|
Lending required
|
£187,500
|
£187,500
|
|
Loan-to-value ratio
|
75%
|
75%
|
|
Lender arrangement fee
|
1.5% of loan
(£2,812 added to the loan)
|
1.5% of loan
(£2,812 added to the loan)
|
|
Total lending including arrangement fee
|
£190,312
|
£190,312
|
|
Mortgage rate
|
5.29% variable (LIBOR linked)
|
3.63% variable (LIBOR linked)
|
|
Monthly mortgage payment
|
£839 pcm
|
£576 pcm
|
|
Monthly rent
|
£1,833 pcm
|
£1,100 pcm
|
|
Net rent after mortgage
|
£994 pcm
|
£524 pcm
|
|
Annual gross yield
|
8.8%
|
5.2%
|
This illustration doesn’t include some of the associated costs, such as a valuation fee, but demonstrates how the initial financing costs for a dual-use property can be significantly lower than for a residential property, and the comparable increase in cash generated each month when considering the rental income less the mortgage repayments.
Whatever property investment you are considering, we recommend getting in touch with an experienced and reputable broker to help you understand which would be the best mortgage product to suit your requirements.
The team at Revolution Finance Brokers are here to help, so give us a call and let us assist you in achieving the most beneficial financing for your investment!
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.
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