Brian Hall, mortgage consultant and founder of buy-to-let index The Model Works, said mortgage advisers must be equipped to quantify the risks for clients, especially on interest-only strategies on large, highly geared portfolios where investors are most vulnerable.
Ideally, advisers should be able to advise on investment alternatives, understand the business issues and be familiar with the tax implications of their mortgage advice, said Hall.
The property bubble provided “enormous returns” of 77% over five years, said Hall, but given the chaos created by asset price bubbles around the world it is unlikely that a property boom will be allowed to reoccur.
Over the past five years a cash buyer would have broken even while a geared investor would have lost almost 70% of their original stake, if they were to sell their property today.
The trend appears to be for these losses to increase, said Hall.
Research from a The Model Works Profitability Index highlights confirmed that many buy-to-let investors are making losses and at best breaking even. The problem centres on falling house prices and hidden costs, said Hall.
“The math is simple. If you bought a buy-to-let property five years ago, with a 10% deposit and a 90% mortgage, and property prices then rose by 10%, you would double your original stake. But if house prices fell by 10%, the original stake is lost, said Hall and Nationwide data, shows that prices have fallen fell by 12% over the past five years.
Rental yields can’t compensate for the house price falls, said Hall.
Hall’s calculations suggest a property bought for £100,000 with a 75% Loan to Value fixed rate mortgage at 5.06% achieves a 6.60% yield. Repayments of £441.07 per month and a rental income of £550 per month deliver a yield of £108.96.
However, after a loss of 12% over five years, the loss in equity is £200 per month.
“Add arrangement fees, acquisition costs, opportunity costs, voids and arrears, maintenance, management and insurance and selling costs and the losses pile up,” said Hall.
The Model Works Profitability Index reveals these trends over 5, 10, 15, 20 and 25-year investment periods, for cash buyers and geared investors with both repayment and interest only mortgages.
For Brian Hall’s blog, click HERE
