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A Piece of England

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23/9/2022

So, who's been swimming naked?

 
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Ultra-low interest rates have supported highly mortgaged investors for a decade. Now, the tide of rising interest rates is leaving many exposed. Some are heading north for the higher yields on offer.

Around half of all buy to let investors fund their property with a mortgage. One widely used strategy is to use as high a loan as possible, typically 75%, on an interest only basis. This strategy means that the investor pays just 25% of the property price, but will receive 100% of the capital gain upon sale. In addition, if the rental income exceeds the costs including mortgage interest, he generates a monthly profit.

The risk lies in rising interest rates.

For those who adopted this strategy on a low yield property, in London for instance, that risk may be about to become a reality. Landlords who recently borrowed at a low rate could find their cash flow turning negative when their mortgage is repriced.

There are investors who find a reasonable level of negative cash flow as acceptable and will ride out the storm in order to achieve the original objective of maximising capital gain.

Others will be looking at ways to turn cash flow back to positive. It may be that they simply need to wait until the end of the current tenancy and re-let at current market rents. Others might reduce the value of the mortgage by putting in more cash.

A large number of landlords have gone down a different route. Low yields are the main reason why London based investors are increasingly purchasing outside of the capital. 66% of them now buy properties in the regions, up from 26% ten years ago.

This year, 20% of London investors bought in the north of England, up from just 1% a decade ago ago. Today, 29% of all properties bought as buy to lets in England are the North West, the North East and Yorkshire.

New investors might look carefully at the level of mortgage they take on. A 65% loan-to-value gives much greater cover for rising interest rates, significantly de-risking the investment.


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