For most Loughborough people,
a mortgage is the only way to buy a property. However, for some, especially homeowners in Loughborough who have paid off their mortgage or Loughborough buy to let
landlords, many have the choice to pay exclusively with cash. So the question
is, should you use all your cash, or could a mortgage be a more suitable
option?
Well, looking at the numbers
locally 5619 of the 19,504 property sales in
the last 7 years in Charnwood were made without a mortgage (i.e. 28.8%). Interesting when compared
with the national average of 31.9% cash purchases over the last seven years.
Next,
I wanted to see that cash percentage figure split down by years. As you can see
from the graph, this level of cash purchases versus mortgage purchases has remained
reasonably constant over those seven years:
Next, if you are going to go
for a mortgage, the next question has to be whether you should fix the rate or
have a variable rate mortgage. In the last Quarter, 90.57% of people that took
out a mortgage, had a fixed rate mortgage at an average interest rate of 2.27%,
although what did surprise me was only 65.79% of the £1.429 trillion mortgages
outstanding in the whole of the UK were on a fixed rate. The level of mortgage
debt compared to the value of the home itself (referred to as the Loan to Value
rate - LTV) was interesting, as 61.9% of people with a mortgage have a LTV of
less than 75%. Although, one number that did jump out at me was only
4.33% of mortgages are 90% and higher LTV - meaning if we do have another
property slump, the number of people in negative equity will be relatively
small.
Next, looking at the actual number
of properties sold, it can be clearly seen that the number of house sales has dipped
slightly in 2018:
So those are the numbers - let us have a look at the pros and cons of taking a mortgage, with specific
focus on Loughborough buy to let landlords.
Taking a mortgage will help a
landlord increase their investment across more properties to maximise the
return, rather than putting everything into one Loughborough buy to let property.
This will enable the landlord to ensure if there is a void in the tenancy, there should
still be rent coming from the other properties. The flip side of the coin is
that there is a mortgage to pay for, whether or not the property is let.
The other great motivation of
taking a mortgage is that landlords can set the mortgage interest against the
rental income, although that will only be at the basic rate of tax by 2021 due
the recent tax changes. Banks and Building Societies will characteristically
want at least a 25% deposit (meaning Loughborough landlords can only borrow up
to 75%) and will assess the borrowing level based on the rental income covering
the mortgage interest by a definite margin of 125%.
A lot will depend on what you,
as a Loughborough landlord, hope to attain from your buy to let investment and
how relaxed you would feel in making the mortgage payments when there is a void
(interestingly, Direct Line calculated a few months ago that voids cost UK
landlords around £3bn a year or an average of £1000 per property per year). You
also have to consider that interest rates could also increase, which would eat
into your profit, although that can be mitigated with fixing your interest
rate (as discussed above).
So, with everything that is
happening in the world, does it make sense to buy rental properties? Now we
help many newbie and existing landlords work out their budgets, taking into
account other costs such as agent’s fees, finance, maintenance and voids in tenancy. The bottom line is that we, as a country, aren’t building enough property so demand will always outstrip supply in the medium to long term, meaning
property values will keep rising in the medium to long term.
That’s not to say property
values might fall back in the short term, like they did in 2009 Credit Crunch; the
1988 Dual MIRAS crash; the recession of the early 1980’s; the 1974 Oil Crisis; the early 1930’s Great Depression; yet every time they have bounced back with
vigour. Therefore, it makes sense to focus on getting the best property that
will have continuing appeal and strong tenant demand and, to conclude, buy to
let should be tackled as a medium to long term investment - the wisest
landlords see buy to let investment in terms of decades - not years.
For more thoughts on the Loughborough Property market, and for great Buy to let deals, irrespective of which agent is selling the property, please feel free to call us on 01509 260777 or email me.
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