The Rental Market and Interest Rates: Advice for Landlords
There’s been a lot in the press over the last few weeks about interest rate hikes in the UK mortgage market which has concerned a number of landlords – specifically about whether or not to stay in the market.
It’s no lie that rates have jumped substantially over a short period, and we would always recommend taking the right advice from a qualified broker. However, the recent announcement from the ONS on 19th July suggests that inflation is falling faster than originally expected. That could signify new hope that the pain will be relatively short-lived for mortgage holders. At the end of the day, what you choose to do will depend on your individual circumstances.
If you’re looking to remain in the market or have been debating investing and are now unsure of what to do, in this article I’ve put together a few quick headline tips.
Buy the right property:
Making sure you purchase a property that will suit your circumstances is key. There are definitely some excellent, high-yielding deals available to those who know where to look. I’ve written more about buying the right property here.
Don’t take out a massive mortgage
With rates where they are at the moment, it’s really worth considering your loan-to-value first before diving in. Typically, you need at least a 25% deposit. I would personally aim for closer to 50%. Definitely take advice from a broker on this point.
You can also use the mortgage repayments as “leverage” to improve your yield. By taking out a mortgage on even a small proportion of the property value rather than purchasing 100% cash, it’s possible to achieve a better yield (as long as you are earning after expenses).
Not all mortgages are a bad thing currently, but the advice would be to make sure that the payments are affordable and stress-tested in case rates fluctuate, preferably with the rent clearing 125% of the mortgage payment.
Have a long-term view
Playing the long game will help you realise the returns of rental income as well as the yield from capital growth. I’ve previously shared this stat looking at house price growth here:
The above graph, taken from Savills and originally data pulled from the ONS, is an overview of price increases since 1952. The trend is pretty clear: average prices have effectively increased from approx. £50,000 in the 1950s to £250,000 in the 2020s. Even if you purchased a property in the early 2000s, the average value was £125,000. Therefore in 20 years, on average, the value of your investment would have effectively increased by 100%, which equates to a monetary value of £6250 per year, or an annual percentage yield of 5%.
If we assume that historical trends over 20 years will roughly follow the same patterns and you purchase a property with a monthly rental yield amounting to 5% per year and keep hold of it for approx. 20 years, then you could in theory demonstrate a gross yield of 10% per annum for the period of ownership.
In summary, with certain assumptions in place, the overall rate of return for investing in rental property is both strong and reliable.
Where do I go for reliable mortgage advice?
Whether you’re considering your first buy-to-let investment or looking to expand your existing portfolio, you’ll need reliable advice.
At Nicol & Co, you can find exactly that. From a 15-minute chat to a longer consultation, book online today here