Thu 24 Jan 2019
For most people in Runcorn, a mortgage is the only way to buy a property. However, for some, especially Runcorn homeowners who have paid off their mortgage or Runcorn 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?
Looking at the numbers locally:
2,893 of the 10,761 property sales in the last seven years in Halton were made without a mortgage (i.e., 26.9%)
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 vs mortgage purchases has remained reasonably constant over those seven years:
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.
Looking at the actual number of properties sold below, it can be seen the number of house sales dipped slightly in 2018:
So those are the numbers. Let us have a look at the pros and cons of taking a mortgage, with a specific focus on Runcorn 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 Runcorn 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 Runcorn 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 Runcorn 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 by 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 we as a country aren’t building enough property. 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 as they did in 2009 credit crunch, the 1988 dual MIRAS crash, the recession of the early 1980s, 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. To conclude, buy to let should be tackled as a medium to long term investment because the wisest landlords see buy to let investment in terms of decades – not years.