Is it freehold or leasehold?
Depending which development, all apartments in the UK are now leasehold which is standard on all multi use property within the UK for all new build apartments in England and Wales built since 1960. The leasehold structure is required on the basis that not any one owner of an apartment can own the land outright, as they share the plot of land of which the apartment block sits i.e. there cannot be any one owner of a piece of land where multiple properties share the same plot.
In case of leasehold what is the term of the leasehold?
Typically 125yrs
Is it only available for expats or is it also available to none expats as well?
Any nationality can buy UK property although mortgage wise all the rates provided by Prosperity are all current deals relevant to UK expats. --- Prosperity arranges all clients completion funding, all rates provided within our financials are all current mortgage rates. We work with different lenders on our developments and have relationships with alternative buy-to-let lenders and brokers such as ‘Mortgage Plans’ who currently have an exclusive deal with Ipswich Building Society offering a 3.69pc two-year tracker rate. They also have offers from Halifax, NatWest and HSBC all of which are for expats (the latter only lends to HSBC Premier customers).
Also, a new lender to the expat market, Channel Islands-based Skipton International, where current deals include a discounted variable rate at 3.99pc and a five-year fixed rate at 5.49pc.
The majority of the lenders Prosperity utilise allow the use of the rental income derived from the property as proof of income, by using a rule of 120% – requiring the yearly rental to be 20% more than the interest and capital mortgage payment amount. In our cases 120% is the minimum we achieve, our current project for example achieves an average of 138% mortgage coverage.
Although not ‘guaranteed’, we have to date obtain loans for the majority of our historic buyers. In a few cases clients have had to raise further deposit to bring their Loan To Value to 60% to obtain these mortgages - although this is obviously not the objective or anticipated, taking into account our typical capital values these are not huge amounts if ultimately needed in this scenario...
In addition to this although Prosperity do no not currently offer long term mortgages in-house, just the short term 3 yr extended payment plan - following a client’s two year deposit building phase, (this current product being our five year ‘60 month’ payment plan) this is due to be extended to seven years early next year (2015) so will comprise - 2 year deposit phase, followed by 5 year repayment option – which may fit your requirements better if looking to add a further property purchases.
All plans are interchangeable so by starting with a ‘two bedroom with parking in Peterborough’ based on option 2, come completion we could switch to the traditional mortgage route if desired or utilise our in-house funding option based on situation / your preferred choice at that time and add a further property by any of the purchases plans on offer to fit your budget.
Is the rental agreement guaranteed for the whole term of the mortgage or could a client be in a situation where it can’t be rented out so he have to pay the mortgage from his own pocket?
The rental guarantee covers rental voids and insures against non-payment of rent by the tenant.
Unlike most other rental guarantees where the developer uplifts the value front end to cover the cost of the rental on completion, based on our discounted prices this is not possible with our product. Prosperity outsource their rental guarantees by a tendering process. We are currently working with Belvoir who underwrite to pay any rental voids from the first tenant moving in to the property for 5 yrs. giving the client peace of mind there will be 100% of the rental income received whether there are tenants in situ or not. The 5yr agreements are renewable but as rental yields are going up we’re only advising clients to commit to 5yr terms at this stage.
It is purely an economic equation for Belvoir to offer this guarantee, from an underwriting point of view they work on the principle of over 80% occupancy providing a breakeven point with between 80-100% providing profit… this is on top of the 8% per unit income generated by way of management fees.
Rental guarantees by Belvoir will be leases based on standard ‘English Assured Short-hold Tenancies’. These are the standard legal contracts used for tenanting property in the UK for extended purposes.
From a credibility point of view we chose Belvoir as the guarantor as they are currently the UK’s largest franchised property management company and provide the covenant strength behind the tenant.
Belvoir and specifically these rental agreements are registered under the Financial Services Authority - Reference Number 309103.
They are also members of ARLA, Safe Agent, NALS and The Property Ombudsman which again provides further comfort to our clients and adds to their credibility. We have chosen to work with Belvoir for our rental guarantees and management as they are the very best in the business and provide the highest quality service. Belvoir! Have a proven track record in the industry and are a company we have worked with for many years.
Is the mortgages interest rate guaranteed throughout the whole term or can there be any changes?
The mortgage interest rate isn’t fixed and this is the only variable we have throughout the whole process. If the interest rates were to change then we would purely adjust the mortgage period accordingly. UK mortgage rates will enviably go up over the next few years and certainly within the clients property ownership period. This however will not mean clients have to contribute any further funds to their property purchase through Prosperity. Our average client is aged between 45 and 55 so are typically looking for time horizons of between 10-15 years to fit within their desired income goals.
When looking at the clients financial obligations at the point of purchase we know of all the variables except one. We can prove the local area property value, so can prove the value of the Prosperity discount. We know what the client’s 30% deposit will be, which is divided by 24.
So clients know at the point of purchase what their commitment is over the next two years – this doesn’t change.
At completion we know the gross rental income and from this we minus the yearly. From this figure we structure the clients loan over the shortest possible time frame, utilising all of this net income. The only variable we are faced with is UK interest base rate.
If rates were to go up there would still be no further contributions required, if rates were to go up by say 1%, based on our average loan size, based on our average property value, this would add typically 9.6 months to the clients repayment term.
The only time a client has to 'top up' is if they are set on the exact date when the mortgage is to be repaid and pure income generated. In this case the client can supplement the mortgage payments to keep their desired date in line. The other factor is historically base rates and rental yields have moved upward together so as base rates have risen so have rental values - this being the case there is typically an offset as income and expenditure have risen together.
Either way we advise clients if these changes occur and explaining at the point of a base rate or upward rental income change how these changes effects them.
Is the rental income taxable?
Tax wise, for both UK residents or non residents, UK income tax is only applicable on the net rental proceeds over £10,000 per annum. Investors can also use their wife’s name, so effectively this can doubled if purchasing a second property.
Subject to how the client is planning to buy, any loan interest is an expense as are service charges, ground rent, any maintenance and management costs so this obviously reduces the taxable gain.
For example, a two bedroom apartment at say our development at Orton Plaza will generate £7,800 per unit gross income minus expenses of £1,174.00 pa for all expenses as noted above, the interest proportion of the clients loan is also off set against income (being in this example case £2570). The net income subject to tax would therefore be £4055.84 (per person)
Using this example and subject to any other UK derived income this client can buy up to 2.5 'Prosperity' units tax free throughout the loan period and own two properties long term once unencumbered producing full rental income. The client can receive these monies tax free up to the maximum £10,500 UK income tax allowance prior to paying any tax.
Capital gains tax wise, currently non UK residences do not pay capital gains tax when selling UK property as an overseas landlord although this due to change in 2015 - the general consensus is any tax increases will be London focused as the UK government are trying to cool down the central London market but will not want to hinder overseas investment in UK property as a whole… We do not believe they will include a CGT tax to the UK nationally as that could be detrimental to the UK property market which is not the objective.
Is there any increase in the rental? (should be an increase to cover inflation etc.)
As above - The rental guarantee is 5yrs renewable. Upon renewal the rental price can be increased as per the local market prices at that time.
When is the earliest a client can sell the apartment?
Following exchange, the title to the property is granted day one so clients are free to sell at any time.
Does Prosperity take care of the second hand market or is it the clients own responsibility to sell his apartment, if he wish so?
Prosperity hold 30% of the overall units for each project. When the build has been completed these will be sold on the open market. If the client wants to sell at the point of completion then we can sell their unit alongside ours and do so on a regular basis.
Is there any insurance to cover if a tenant destroys the apartment or if it burns down?
Contents insurance should be arranged by the tenant. Structurally the building is covered by the building insurance within the service charge.
The reservation deposit is that deducted the purchase price as a down payment?
No, this is purely to access the product – Due to the unique way Prosperity underwrite their developments these fees are charged to firstly access the discounted institutional prices and rental guarantees, secondly the fully management services we provide throughout the whole purchase process. As a prosperity client they will be kept fully informed and updated throughout their purchase and beyond. We manage everything from contracts to making sure their carpets are fitted correctly at handover. A personal account manager will be allocated to look after your client and their property.+
Why not buy into student accommodation?
Student pods can be a well packaged product and may well deliver what they’re offering – based on the rental covenant strength being confirmed and not a developer based guarantee (which is the area to be careful).
The issue with these deals firstly is being able to find a reliable valuation for what your buying – the prices are based on yield not capital value so they work the prices back from the headline rental yield which doesn’t in any way reflect the value of ‘a room’ within the building.
The image you see is what you’ll get, a room – the yield performance is normally good but the resale is zero. That’s our main issue with student pods, hotel apartments, parking spaces, storage unit opportunities, yes they provide strong yield (if the rental guarantees are what they propose to be and the companies are around for the lease term) but there is no resale exit route at the end of the term.
If you can achieve 8% on a standard UK property in a desirable location that can be sold in the open market and appreciates with the market why buy a student room which there is no aftermarket – for the additional yield margin of 1-2%? If bought well the capital appreciation on a standard residential property that produces an 8% yield will total more than the difference you lose in yield margin tenfold – with the major benefit being you can sell the asset and liquidate your investment in the open market at any time…
what is worst case of scenario that can happen?
The short answer is that we have been delivering property based on this formula for many years and our developments are structured to be extremely safe and robust. In simple terms the payment plan is ultimately the clients safe guard. By structuring a purchase this way combined with the contract measures and insurances in place our purchasers only ever pay in line with the build status and assures quality, with insurance in place to complete the build to the pre agreed specification.
The technical, legal answer;
Firstly, to provide the secure ownership Prosperity offer their clients post reservation, the property is exchanged in the standard legal way where the owners title is lodged against the UK land registry (recognized as one of the legally safest places in the world in regard land and property ownership) A clients buy 100% of the property and it is owned in the standard legal way. This means the 30% deposit is secured against the property as it is paid. with a 70% balance by way of mortgage secured in the usual way.
The release method of these funds lessen any risk for clients as all payments are made in line with construction in stages as follows, and only released post these stages being met and quality control has been signed off. Based on our typical contract terms, the developer is paid the following instalments once the following stages have been signed off by building control;