What you need to know about investing in property in 2021

As saving rates fell to historic lows this year and with negative interest rates still a possibility, some consumers could start to look towards investments as a way to earn better returns as we move into 2021.

Before considering investments, it is important to remember that, unlike depositing money into a standard savings account or cash ISA where the initial deposit is secure and interest guaranteed, they carry the risk of investors not only failing to make any returns on their investments, but they can also lose part or all of their initial funds deposited as well.

Saying this, for those comfortable taking the risk, investments can be a good option for those looking to earn higher interest than that being offered by savings accounts. One of the most common ways for consumers to invest their money in the long-term is through property.

Here, we’ve looked at what you need to know if you are thinking about investing in property in 2021.

Despite the economic uncertainty and high levels of redundancies during 2020, a report published by the Royal Institute of Charter Surveyors (RICS) in September revealed that the rental market had remained strong in all areas of the UK except for London. As such, a buy-to-let (BTL), especially outside the capital, may be a good investment opportunity next year.

Although BTL can offer a good return on investment, there are many factors to consider when thinking about investing in BTL. For example, potential landlords need to calculate the rental yield – which can be done using our rental yield calculator – to ensure that the investment is profitable. In addition to this, potential landlords will need to factor in the ongoing costs of maintaining the property and covering costs for periods when the property may remain unoccupied.

Another important factor when considering a BTL investment is the rate of the BTL mortgage. Our research shows that since the start of the year, the average rate on a two and five year fixed BTL mortgage at a 75% loan-to-value (LTV) has increased. The biggest rise was on a two year fixed BTL deal at 75% LTV, which has increased by 0.14% from 2.86% on the 1 January 2020 to 3.00% on the 1 December 2020. During this same period, the average five year fixed rate on a 75% LTV BTL mortgage increased by 0.10%, from 3.29% to 3.39%. As the table below shows, average rates on both two and five year fixed BTL deals at 75% have been rising over the last few months, which could see them continuing to rise into 2021.

Those considering investing in a BTL should be aware that we’ve only looked at average rates at a 75% LTV, and as such there could be much more competitive rates available in the charts than the average rates shown, as well as more competitive rates at lower LTVs. To find the best rates, investors should visit our BTL comparison charts or consider speaking to a mortgage broker, who will be able to highlight the best deals for their individual circumstances.

An alternative way for consumers to invest in property is through a real estate investment trust (REIT). A REIT allows consumers to invest in a property investment firm that in the UK is listed on the stock exchange. Investors generate income through rents and sales within the property portfolio, with profits shared with investors as dividend payments. REITs can be a very tax-efficient way of investing as they can be held in an ISA, self-invested personal pension (SIPP) or Lifetime ISA (LISA). To find out more about REITs, read our guide How to invest with a real estate investment trust (REIT).

When considering a REIT, investors should be aware that they carry the same risk of not generating a return, as well as the possibility of losing the initial investment.