So, everyone’s on the equity withdrawal game, thanks to the value of property
continuing to go up (by nearly 10% in 2006). In the final three months of
last year, we took a staggering £14.6 billion out of our homes through the
simple ploy of remortgaging them.
Of course, some of this went to pay off debts or cover improvements to the
family home. But quite a lot of it was taken out of buy-to-let properties
and used to make further investments. It’s the trick all serious investors
use and one of the reasons buy-to-let took off in the first place. Buy a
property, watch it grow in value, remortgage it to turn some of this “paper”
profit into hard cash and then use it to help buy another buy-to-let. The
aim is to maximise what is known as “leverage” and minimise the amount of
your own money you have tied up in the property.
The key to making the system work is obviously (obviously!) to buy something
that will swiftly put on value — and the best way of ensuring this is to buy
either a property that can be improved or one that is in a location that is
itself improving, through gentrification or by the imminent arrival of a
railway station, shopping mall, airport or Gherkin.
The other factor encouraging people to cash in on their investments is that
some mortgage lenders have relaxed the rules governing how much you could
borrow against your buy-to-let property. Most of them used to insist that
the rent would have to be equivalent to 125% of your mortgage repayments,
leaving you a bit of cushion in case of vacancies or rent arrears. Now, some
will allow you to just cover the mortgage repayments (even though there is
often an extra charge for the privilege). Risky? Maybe, especially when
interest rates still seem to be on an upward trend, but this facility does
mean that you can keep on borrowing to invest.
“As soon as they can, people are remortgaging,” says David Whittaker, managing
director of Mortgages for Business. “If they don’t, they feel they aren’t
making proper use of their capital. And they’re not. Depending on which
mortgage you have, most people are remortgaging every second year, because
some deals have redemption clauses that disallow remortgaging any sooner.”
But isn’t there a small problem in all this: namely, that if you remortgage
your buy-to-let flat, then, unless you manage to get some miraculous new
mortgage deal, your monthly interest payments are going to rise — which
means you may have to increase the rent to ensure that the place continues
to pay its way? That is, if anyone is ready to pay that new, higher rent —
especially since you are already probably charging as much as you can for
the property.
I turn to David Stubbs, senior economist at the Royal Institute of Chartered
Surveyors. “Well, given the low level of rents in the UK, I suppose your
investment could become cash-negative if you remortgaged it too
aggressively,” he says. “However, we find that on average, most buy-to-let
investors are rather cautious. The average borrowing is 50% of the value of
the building, which is well below a worrying level.”
This kind of serial remortgaging has been the key to the booming portfolio of
Matthew and Peter Jones, identical twins from south London. Their knack of
finding fabulous investments in the capital is such that they have just
opened a buying agency, M&P Homefinder, for fellow investors who are
keen to follow them laughing all the way to the bank.
“Every year or two, we remortgage our properties, perhaps doing three or four
a year,” says Matthew. What about all those redemption penalties? “We don’t
use mortgages with redemption penalties.” Oh, right. What about your
mortgage-to-value percentage, then? “We keep it at about 70%,” he says.
Don’t you have to keep putting the rent up? “Over the course of two years,
the rent will have generally gone up anyway. We find it works out very
well.” The Joneses’ formula appears to be as follows: buy a property; after
two years, remortgage and put the rent up at the same time; then repeat.
“It’s also tax-efficient,” says Matthew, “because if you put your money from
the equity withdrawal straight back into property, you don’t pay tax on the
rental income that covers that mortgage.”
It is important that you plough the money back into the business, as it were.
Spend it on a Porsche, a cruise or other such frippery, and you will find HM
Revenue & Customs will not take such a favourable view of things — and
won’t allow you to offset that extra chunk added to your mortgage each month
against the rent.
But what about the two interest-rate rises last year and a third in January,
with probably more on the way? Doesn’t that faze all these equity removers?
Not really, says George Radonich, a financial adviser with Partners Wealth
Management in the City. “People want to buy more properties. They’ve done
pretty well out of property already, but they don’t want to use their own
cash to stump up the 15% deposit on the next one. They’ll use capital
released from another property. Frankly, I think the issue, more than the
fear of interest rates going up, is the situation with stock. Finding
anything decent to buy is the problem.”
It is a highly desirable problem, of course, because the shortage of supply is
fuelling the continued rise in house prices, which in turn is fuelling the
trend to remortgage and buy more properties.
“Where will it all end?” I ask Mr Millard. He doesn’t seem to hear me: he is
too busy doing calculations on the back of an envelope.
buytolet@sunday-times.co.uk
Of course there is nothing decent left to buy. All you greedy buy-to-let people have bought everything already making everything even more overpriced for the rest of us.
Tamsin Butler, KENT,
Are other landlords being asked by members of ARLA to pay for TDS insurance for properties that were let prior to April this year? Is this a way for ARLA members to make a quick buck? Two agencies that I use have asked me to insure but this is not possible with existing agreements.
I would love to hear your comments and perhaps it should be looked into.
Judith weeks, woking, surrey
We already know where it will all end - in possibly the largest housing crash the world has ever seen. The correct question to ask is *when* it will all end.
F Harrison, London,
My BTL portfolio is my way to exit the rat race. No longer content to remortgage to buy another low yielding property, I'm remortgaging to buy a medium sized hotel yielding 12% instead. Without BTL, I could never have reached this level which is the preserve of wealthy families and CEO's using investors funds.
Hooray for BTL & the AST!
Matthew, London,