The government is trying to curb investors’ enthusiasm for buy-to-let property but yields still beat savings rates available on the high street
Lenders dished out £10bn to buy-to-let investors in the final quarter of 2015, up from £7.7bn a year earlier.
This statistic, released by the Bank of England, prompted its deputy governor for financial stability Sir Jon Cunliffe to claim the buy-to-let lending boom poses a threat to the economy.
But estate agents say there’s a simple reason why investors are ploughing their money into property rather than stocks and shares or savings accounts.
A spokesman for Fulham-based independent estate agent Lawsons & Daughters says: “Interest rates for savers are at an all-time low and rent prices in London are 6.2% higher for the three months to January compared with the same period in 2015.
“Not only that, the value of buy-to-let properties in many parts of London has increased by more than 10% over the past 12 months.”
In London Bridge, for example, local estate agent Williams Lynch points out that the value of residential property shot up by 19.4% in the 12 months to March 2016.
Even in London’s golden postcodes of Knightsbridge, Kensington and Mayfair – where the price of houses can top £79m – property prices and rents have risen over the past 12 months, according to Belgravia-based estate agent Best Gapp.
Despite the government’s attempting to shrink landlords’ income through an increase in stamp duty for buy-to-let properties, abolishing the wear and tear allowance and mortgage interest tax relief, buy-to-let investment is still a wise move – if you plan your purchase with military precision.
Battersea estate agent Eden Harper, which reports that buy-to-let investors purchase many of the properties it has on offer, provides 5 valuable pieces of advice.
1. Find the best buy-to-let mortgage deal
Having decided on your ideal buy-to-let investment opportunity, attention turns to seeking the required finances. Specific buy-to-let mortgages should be used to buy investment property because these allow the borrower to make money from the flat or house by renting it to tenants, unlike standard residential mortgages. Independent advice will help you make the right decision.
2. Put down a 40% deposit
While it is possible to obtain a mortgage on a buy-to-live property worth 90% of its purchase price, landers require buy-to-let investors to put down deposits of at least 25%. And the best buy-to-let mortgage deals are often reserved for borrowers who can produce a 40% deposit.
3. Make sure rental income equals at least 125% of mortgage costs
The better news is many lenders do not consider your income when making buy-to-let mortgage decisions, rather how much money the property will generate through rental income. But beware, for a buy-to-let investment to be considered worthy of a mortgage your rental income must be around 125% of the mortgage payments or higher.
4. Calculate your yield
The value of a rental investment is determined by the property’s yield, not how much the house or flat is worth. Yield is the rental return as a percentage figure of the property purchase price.
If you were charging £1500 monthly rent, or £18,000 a year, on a £300,000 property your yield would be 6%.
However, this assumes you have bought the property outright. To calculate a rental property’s true yield, it is necessary to deduct mortgage costs from the rental income.
If the monthly cost of the £180,000 mortgage you would need to buy a £300,000 property (after putting down a 40% deposit) is £950, or £11,400 per year, then your yield will be just 2.2%, which is still better than the rates offered on many savings accounts.
5. Don’t forget other costs
Investors also need to take into account all other running costs, including maintenance, agents’ fees, insurance and the capital that should be put to one side for emergencies.