Ok, this needs an example. Say I want to purchase a two bedroom flat in Edgbaston to let out. I would expect to pay about £170,000 for it at todays prices. At a good tracker repayment mortgage rate, that's about £1000 a month over 20 years if I put down about 10% deposit. Similar rentals in the area are only about £650 per month. This is a poor buy-to-let investment on the face of it, except that the capital amount is gradually being paid off so you could consider it acceptable. The benefit someone mentioned earlier about having the property at the end of the term only works if you have a repayment mortgage.
However, most buy to let professionals will not be bothered by the capital return, instead they will look at the cost of borrowing versus the rental income. On an interest only mortgage on a 2 year tracker, the monthly payment is about £620. Again a very low yield, but it's not negative. I would be foolish to rely on the capital gain on the property, but many people do take this risk. To make any real money, you need about 7-8% yield at the moment, which is near impossible to find.
The problem for the rental market is that if there are a lot properties about like this, they will find that rental prices are closely tied to mortgage rates. This never used to be the case because a lot of rentals were owned by career landlords and firms, not ordinary folks. I don't know the stats, but if a lot of people have done the buy-to-let thing as a sideline they may cause problems in the rental market.
The opportunity for the renter who is looking to buy for themselves is that they could instead of paying rent to a landlord, be paying their rent into a mortgage which (on long term performance) should be exceeded by the capital value of the property in the long run. It only works if you are in it for the long term and are prepared to hang on to the property if the equity goes negative. In the short term, rentals are obviously more flexible, but you are not accumulating any capital.
eg. If you had purchased a property in 2000 for a mortgage of around £650 a month (ie. current rent rates), you would now have a property which was worth twice as much if you chose to sell it. When you sell it, you return a capital gain.
However, most buy to let professionals will not be bothered by the capital return, instead they will look at the cost of borrowing versus the rental income. On an interest only mortgage on a 2 year tracker, the monthly payment is about £620. Again a very low yield, but it's not negative. I would be foolish to rely on the capital gain on the property, but many people do take this risk. To make any real money, you need about 7-8% yield at the moment, which is near impossible to find.
The problem for the rental market is that if there are a lot properties about like this, they will find that rental prices are closely tied to mortgage rates. This never used to be the case because a lot of rentals were owned by career landlords and firms, not ordinary folks. I don't know the stats, but if a lot of people have done the buy-to-let thing as a sideline they may cause problems in the rental market.
The opportunity for the renter who is looking to buy for themselves is that they could instead of paying rent to a landlord, be paying their rent into a mortgage which (on long term performance) should be exceeded by the capital value of the property in the long run. It only works if you are in it for the long term and are prepared to hang on to the property if the equity goes negative. In the short term, rentals are obviously more flexible, but you are not accumulating any capital.
eg. If you had purchased a property in 2000 for a mortgage of around £650 a month (ie. current rent rates), you would now have a property which was worth twice as much if you chose to sell it. When you sell it, you return a capital gain.
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