ASK542: Should I add mortgage fees to my loan? PLUS: My tenant is running a business from my property - what now?

0:01Rob B:Hi, I'm Rob. And I'm Rob. And this is Ask Rob and Rob. Hey everyone, welcome to Ask Rob and Rob, the show where you give us your wonderful property questions, normally property anyway, and we do our very best to give you a great answer in return. We'll try that format once again this week. But before we do, let's give you a quick reminder of how you can get your question on the show.

0:23Rob D:Yep, it is so easy. You just have to go to propertyhub.net slash ask. And once you're there, you can leave us a voicemail, which is amazing because we get to hear other people's voices on the show and we get to hear questions that take us into areas that we would never otherwise cover. So we love it. And helping us to do that today is Esther. Hi, Rob and Rob. Thanks so much for all the content. Been listening for a while now. And currently we are in the process of buying our first property through Property Hub, which is very exciting. My question is around mortgages with or without the fee. So we've been quoted quite different percentages for with or without the fee, which obviously changes the monthly cash flow.

1:02Rob D:We plan to keep any profits within the business to allow us to purchase future properties and grow our portfolio. It would equate to around£5 ,000 in additional profit over the five-year term versus a fee of around£6 ,000. I understand the fee can be added to the loan amount and so is the reduced monthly payments and increased cash flow worth it? Our strategy is long-term growth, but any profits that we do retain will help us to grow the portfolio quicker. The total repayment amounts are slightly less on the higher rate with no fee, but it feels like with inflation eating away at the total loan value, then the long-term, it may work out in the favor of having the lower interest rate and therefore the higher cash flow at our disposal for portfolio growth.

1:49Rob D:We plan to get a five-year mortgage for various reasons and so hope that in five years, you know, maybe the rates are going to be better and then we can look at a no-fee option to avoid adding more to the loan later. We would love to know your opinion on that and what you guys would do in this scenario. Esther, thank you for your question. Congratulations on your property and congratulations on your excellent decision of doing it through Property Hub Invest. This question around mortgages is something that comes up a lot. Everyone wrestles with a decision at some point and there is no right or wrong answer.

2:20Rob D:It's completely personal preference. What I do is add it to the loan and the reason for adding it to the loan is pretty much what you've said. You end up with inflation eating away at that for you and it preserves cash for future purchases. So when you're in the stage of growing your portfolio for the majority of people cash is the scarce resource. So you want to be able to hold back as much as you can for the deposit on the next one and the next one and the next one. So if you can add the fee to the loan, most people find that to be worth it, even though it does mean that your payments end up being higher in future, because you are, of course, paying interest on a slightly higher amount.

2:57Rob D:So the right answer for keeping your costs down is to pay it. But the right answer for preserving capital and potentially growing faster is to add it to the loan. So that's why it's a completely personal situation. It might be that 10-15 years down the line, you've got as far as you want to go. You don't want to buy anymore, and you're more interested in keeping your payments down. You've got cash sitting around within the business, in which case you'd be happy to just pay it as an upfront cost. But at this stage of the journey, I would say the majority of people choose to add it to the loan. And I'd say that you could feel especially comfortable if that's the decision that you do make because you are going for a five-year fix.

3:32Rob D:Because the risk is every two years, you take out a new loan, you add another fee on top. And so your balance just keeps going up and up, which of course means higher interest costs. And it also affects your loan to value. but if you're not churning your lending if you are going for five-year terms which again is what the majority of people do these days then it doesn't affect you in anything like the same way ester still completely your choice i can't tell you what's right for you but hopefully knowing the thinking behind it will nudge you one way or the other all righty let's listen to our question in from lawrence hi rob and rob as a shared homeowner with my younger brother we have just recently found out that our long-term tenants are using the residential property to operate a commercial business out of any advice would be welcomed as to where we go from here and how much this can affect our landlord's insurance or any future mortgage applications

4:29Rob B:Lawrence, the first thing I would do is look at what your tenants have agreed to, because normally in the vast majority of standard tenancy agreements, there's a clause restricting the use of a residential property for running a business. It'll probably say for residential purposes only. That's the very first thing I'd do. I'm sure it's in there, but just double check. I want you to know that. You can go for that. And assuming that you have that in place, which I've said is highly likely, I'd take a view. What is a commercial business is the first thing I'd want to know. Is it somebody operating on a laptop, Zoom calls, that type of business?

5:15Rob B:That's effectively remote working. That is very different from somebody using the premises for stock storage and deliveries and sideage and clients visiting the property. so they are very different things and it may be somewhere in the middle which will require more of a view but if it's something quite basic then you might be okay but if it's something like the latter like deliveries and all that type of stuff and people visiting the property then there is going to be action needed and the first thing is to understand from the tenant exactly what they've got set up so is it a formalized business is it a limited company is that something that then allows you to adjust the rent perhaps to reflect it in the future but then there are the things that you've highlighted which are the important stuff which is dealing with insurance and mortgage company and it's the same process if you establish that it is solid commercial activity i've given examples of what that would look like then it could mean that your policies are void so from an insurance point of view if something went wrong they wouldn't pay out i would contact them once you've got all the facts and then disclose it and now that might be a bit awkward and not a great conversation to have but it's better to have that uncomfortable conversation today than invalidate the policy at a key moment in time same logic applies with the mortgage contact them understand where you stand before it becomes a problem actually i would speak to a broker hopefully you've got a broker a real expert and speak to them to get their guidance and advice but it's probably going to lead to a disclosure now if their activities of what they're doing is causing you issues with either the insurance or the lender or both then you may want to go a step further if you can't get new policies and new lending set up for the removal of that tenant well asking them to stop and if they won't stop serving them notice and it'll be a section eight now because things have changed and that means that you can use the section 8 because they've breached the tenancy terms they've agreed to use it for residential purposes and they've gone beyond that i'm hoping it doesn't go that far for all parties and maybe it can be a happy ending where you can even adjust the rent upwards because of the use and your lender insurance companies are happy but it may mean that you end up at this path as well where you need to get them to either stop and if they won't stop use a section eight now you've got a real understanding of what's at play what you need to do a little bit of work involved unfortunately but it's well worth doing i'm glad you've asked the question it sounds like you're going to take action but your first step is to check your tenancy agreement make sure that clause is in there and then from that point you can follow all the other steps i wish you best of luck all right well that is two more

8:11Rob D:questions answered which means our duty is done and we can leave you to get on with your day we will be back again with the property podcast on thursday so hopefully we'll see you there bye bye bye