With saving rates falling and expected to continue the downward trend for at least the next six months, those with a lump sum of money may earn greater profits investing in a buy-to-let (BTL) property instead.
For those with a £40,000 lump sum to invest, the current top savings rate available is 1.70%, which is an expected profit rate on a seven year bond from Bank of London and The Middle East. After the seven years, savers will have earned £5,009.76 in interest on their lump sum.
Alternatively, £40,000 could be used towards purchasing a BTL property, which could achieve a 5.32% annual rental yield*. Although investors should be aware that a BTL presents a very different type of investment than a traditional savings product and carries more risk and ongoing management.
Today, figures released in the Nationwide House Price Index found that the average house price during June was £216,403. This means that to get an 80% loan-to-value (LTV) mortgage on the average property, borrowers would need a deposit of £43,280.60. As such, it is reasonable to assume that those with a £40,000 lump sum deposit should be able to find a property to invest in at an 80% BTL mortgage rate.
To purchase a property valued at £200,000 on an 80% BTL deal would require a deposit of £40,000. An investment of £40,000 to buy a property at £200,000 and charging the average monthly rent of £886, would result in a 5.32% annual rental yield *.
The best rate on a £160,000 mortgage is Loughborough Building Society’s 2.39% discounted variable deal for two years. To get this deal, a rental income of a minimum of 130.00% is needed, which would mean charging £953.33 per month in rent (calculated at a managed rate of 5.50%). At the discounted variable rate, this mortgage would require monthly repayments of £318.67 on an interest-only mortgage. This would result in investors earning a £634.66 profit per month.
It should be noted that many BTL deals come with specific criteria, which often includes a minimum earned income. As well as this, many deals are not available to first-time landlords, so investors in this situation should visit our first-time landlord mortgage chart to see the best rates available.
When considering investing in a BTL property, there are a number of other costs that have to be taken into consideration. On the positive side, rent can be increased in line with inflation, which means that investors will not have to risk below-inflation returns on their investment, which could happen if locking into a long-term bond. In addition to this, it is likely that if the property is retained for a long period of time, it could make a profit when sold if house prices rise, even if the investor just takes out an interest-only BTL mortgage. But investors should be aware that housing prices could fall, which would result in a loss in the initial lump sum invested into the property at the time of the resale.
Investors also need to factor in management costs of the property. If using a letting agent, they will require a monthly or annual percentage for day-to-day management and over time money will have to be spent on maintaining the property and ensuring it is fit to live in. As well as this, there could be periods of time when the property is not rented, in which case the investor will have to pay the mortgage from their own funds. There is also the possibility of investors having to cover the costs and potential legal fees involved in dealing with non-payers.
Another cost to factor into the investment is tax. In 2017, the Government made a number of tax changes that impacted the buy-to-let mortgage market, which resulted in private landlords operating as individuals, seeing an increase in their tax bills. But many landlords have been able to reduce their tax bill by managing their BTL property under a BTL limited company – read our guide How to set up a Buy-to-Let limited company for more information about this.
Since January, the average BTL mortgage rates at 80% LTV have fallen, with two year fixed average rates falling by 0.46% between January and June and average five year fixed rates falling by 0.21% during this same time period. Saying this, the number of BTL deals available at 80% LTV have also fallen significantly, with the number of two year fixed deals falling from 119 available in January to just 31 in June and the number of five year fixed deals falling from 110 to 19. While there is a possibility that lenders will start introducing more BTL deals into the market again, Eleanor Williams, finance expert at Moneyfacts.co.uk, describes the current mortgage market as “incredibly fluid”, with deals being affected by operational changes and borrower demand. As such, those considering investing in a BTL property should speak to a mortgage broker who will be able to advise them on the lenders currently taking applicants and the best rates available for their circumstances.
*Calculated using the Buy-to-Let Calculator and is intended to give an indication only.
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