And the reason you shouldn’t either.
I know of many Neath buy-to-let landlords who fell into
property investing by accident. Many didn’t want to sell their family home when
the Neath housing market crashed in the Credit Crunch of 2009/10, yet still
needed to move (often for work). They thought they would keep their Neath
family home in case they ever moved back to Neath. Yet by keeping it, it
couldn’t remain empty (there was still a mortgage to pay on it), so they ended
up renting their home out.
And that was the start of many Neath buy-to-let landlord’s
journeys!
Many of you Neath landlords reading this have had your fair
share of problems, from tenants doing a midnight flit, rent arrears and
troublesome tenants, yet also had your rewards.
The average Neath landlord in the last ten years has seen their investment rise by an average of £47,800 and has earned in rent (before costs) £60,032.
Many of you reading this have started to learn about
investing and creating a property portfolio by buying additional Neath homes to
rent. The average Neath buy-to-let landlord now owns 3.38 properties that
generate an impressive passive monthly income with the bonus of growing their household
net-worth through growth in the value of their buy-to-let portfolio.
With the average Neath buy-to-let landlord in the
56-to-58-year age range, one thing I learned about savvy buy-to-let investing, the
shrewd Neath landlords tend to want longer-term mortgages.
Taking longer-term mortgages reduces the risk to the
landlord.
It sounds counterintuitive, yet it comes down to leverage.
Let me explain that whilst leverage is formidable in buy-to-let, it is also quite
risky.
Before I explain why some readers might not know what leverage is
and how it relates to mortgages and buy-to-let, two-thirds of landlords are
debt-free, yet those landlords who have come into the property investment game
in the last 10 or 20 years have had to use borrowed money (mortgages) to
finance their deals. Therefore, by putting down a small amount of say 20% and
borrowing the other 80%, if you calculated your return on an investment base
only the money that you put into the deal, then that is what is called leverage
(i.e. using borrowed money as a funding source
when investing in property and generate greater returns on borrowed money).
You would think, as, say a typical 55-year-old Neath landlord,
you would want to be only taking a mortgage out for however long you intend to
work (say ten years at most) – meaning your portfolio would be all bought and
paid for by the time you retire. Yet the clever buy-to-let Neath landlords I
talk to don’t see their portfolio as having to be paid off (and mortgage-free)
by the time they retire. They have understood how to utilise and administer
their mortgage debt rationally to enhance their returns without taking on unwarranted
risk.
By taking a short-term mortgage of say ten years, compared
to a 25-year mortgage, during those ten years, your monthly mortgage payments
will be particularly high (because the longer the mortgage term, the smaller
the monthly payments will be).
Also, you can pay off a 25-year mortgage in 10 years,
but you cannot pay off a 10-year mortgage in 25 years.
Longer mortgage terms mean lower monthly mortgage payments,
which in turn means greater cash flow and more elasticity within your rental
portfolio. Now to some Neath landlords, possessing their rental properties
debt-free is very important. Yet, I would still seriously consider taking the
25-year buy-to-let mortgage and make additional payments every month to help
you to pay the mortgage off early.
Therefore, as an example, if you have a bad couple of months
without any rent coming in or unexpected bills, you can return to making the
mandatory lower monthly mortgage payments without getting your property
repossessed.
So, by taking on the longer-term mortgage, you
decrease your risk because it has the lower required payments.
Let me give you an example – if our Neath landlord wanted to
buy a Neath terraced house property for say £103,200 and put down a 25% deposit
of £25,800, the best buy-to-let deal I found online on the day of writing this
article was a 1.79% Santander 5-year fixed-rate buy-to-let mortgage.
Looking at the mortgage payments per month when comparing
the mortgage terms; on the 10-year mortgage, the mortgage payment would be £711.14
per month. Therefore, our landlord would have to top up from personal savings to
make up the monthly mortgage payments. Whilst if they choose the 25-year
mortgage, the mortgage payment would be £326.93 per month. This would mean our
landlord would be in profit from day one.
Some might say though the longer term means more interest payments, as it’s 25 years and not 10 years. Yet, at today’s low-interest rates, that would only mean an additional £12,743 in interest payments spread over 15 years – not much in the grand scheme of things.
| 10-year Mortgage | 25-year Mortgage | |
| 25% Deposit Required | £25,800 | £25,800 |
| 75% Mortgage Borrowed | £77,400 | £77,400 |
| Annual Interest Rate | 1.97% | 1.97% |
| Mortgage Length (in years) | 10 | 25 |
| Mortgage Payment per Month | £711.14 | £326.93 |
| Sum of Mortgage Payments | £85,337 | £98,080 |
| Interest Cost | £7,937 | £20,680 |
Therefore, by taking the longer-term mortgage, as a savvy Neath
landlord, you are ‘cash flow positive’, meaning you can build a reserve fund
for every one of your rental properties to enable you to deal with any
unforeseen voids and repairs.
The best way to deal with a buy-to-let property is to see it
as a small mini-business, and as with all businesses, you need to grow your
income and reduce your expenses whilst in the background provide a decent rate
of return for your investment.
The greater the amount of mortgage debt you carry, the greater
your monthly mortgage payments, and the simple fact is, the shorter the mortgage
term, the higher the monthly mortgage payments. So, if you take on a sensible level
of mortgage debt and be ‘cash flow positive’, you can profit from much better
returns without taking on excessive risk.
These are my thoughts – please share yours.
P.S. Before I go, I have to say this to cover my proverbial.
My comments
are only a very brief commentary on the issues raised and should not be relied
on as financial advice and that no liability is accepted for such reliance, and
that anyone needing such advice should consult a qualified financial adviser or
other authorised person.
