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Buying & Selling Money

7th January 2020

Currently, many 5 year fixed BTL rates are below 2%; but this week they are expected to increase.  They still represent excellent value, together with security.  Rarely do these two attributes go together, but you have them now.

Many people cannot get their head around the benefit of being able to borrow cheap money, as they could with getting a discount on a property.

Perhaps this example will illustrate the issue with some clarity.  At the moment it’s possible to get yields on BTL property at 5% in London, you do however need to scour the market for these deals.

If you’re getting 5% rent and you’re borrowing money at 2% this is the same as buying something for £2 and selling it for £5.  You’re making £3; and in this situation, you’re doing it with someone else’s money.

This is a rare opportunity.  If you take a simple example of a property worth £250K and assume a rental of 5% you would be looking at an income of £12,500pa.  Your mortgage cost at 2% on 75% LTV would only be £3,750pa.  This means you gain £8,750pa on a deposit of £62,500.

This is a 14% return.

For the purposes of keeping things simple I have ignored management fees, maintenance, and voids, all of which in a practical example may come into play.

However, in this example we have also ignored the potential for capital growth, which will override the income side of the investment.  At this level, and given the market is buoyant  following the election result, over a 5 year period the rise in capital growth should be significant.  This would also allow you at the end of 5 years to extract the original capital out of the investment.

Even if it is not, which is unlikely given the wave is starting to rise again, and the price point is low, such an investment would be justified on the yield basis alone.

We are currently doing a deal which involves a £400K injection, with the aim of extracting the £400K back out after a 6 month time lag.  You need 6 months before you can revalue the property to extract the money back out.

This deal is being done for 3 reasons.  Firstly, there will be no money left in the deal.  Secondly, we hope to utilise the sub 2%, 5 year fixed rate deal.  Thirdly, the council will shortly be signing an Article 4, which will remove the right for landlords to convert their properties into HMOs.

So, we are in a race, one to secure the rate, the other to secure the HMO planning.  The key will be to look deeply into the detail.  A mortgage offer is normally valid for 3 months.  At times an application for a product will serve to lock the rate in, sometimes the lender asks for a booking fee to lock in the rates.  The process and procedures will need to be looked at very closely.

Suresh Vagjiani

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